Since its debut in 2009, Bitcoin, the most popular and expensive cryptocurrency, has been on a roller coaster journey. It has experienced several cycles of boom and bust, reaching record highs and crashing to new lows. The latest cycle, which started in late 2020, saw Bitcoin surge from around $10,000 to over $60,000 in April 2021, before dropping to around $30,000 in July 2021. What factors are driving these price movements? And what can we expect from Bitcoin in the next two years?
In this blog post, we will explore some of the key drivers and challenges that affect Bitcoin’s price and provide our prediction for 2023 based on various scenarios and assumptions. We will also discuss some of the risks and opportunities that Bitcoin investors and enthusiasts should be aware of. Please keep in mind that this is not financial advice, and you need to do your own research before making any investments.
What Drives Bitcoin’s Price?
Bitcoin’s price is decided by the market’s interaction of supply and demand. The supply of Bitcoin is fixed at 21 million coins, of which around 18.8 million have already been mined. The rate of new coins entering the market is halved every four years, in an event known as the halving. The last halving occurred in May 2020, reducing the reward for mining a block from 12.5 to 6.25 bitcoins. The next halving is expected to happen in 2024, further reducing supply growth.
The demand for Bitcoin, on the other hand, is influenced by various factors, such as:
- Adoption: The more people and businesses use Bitcoin as a medium of exchange, store of value, or unit of account, the higher the demand for it. Adoption can be measured by indicators such as the number of active users, wallets, transactions, merchants, exchanges, and institutional investors.
- Innovation: The development of new technologies and solutions that improve the functionality, scalability, security, and usability of Bitcoin also drives demand. Innovation can be seen in areas such as the Lightning Network, which enables fast and cheap transactions; Taproot, which enhances privacy and smart contracts; and decentralized applications (DApps), which offer various services on top of Bitcoin.
- Regulation: The legal and regulatory environment around Bitcoin can have a positive or negative impact on its price. Regulation can provide clarity, legitimacy, and protection for Bitcoin users and investors, or it can create uncertainty, restrictions, and barriers for them. Regulation can vary widely across different jurisdictions and levels of government.
- Sentiment: The public’s perception and attitude towards Bitcoin can also affect its price. Sentiment can be influenced by media coverage, social media activity, celebrity endorsements, market trends, events, and rumors. Sentiment can be bullish (optimistic) or bearish (pessimistic), depending on the prevailing mood and expectations.
- Speculation: The trading activity and behavior of speculators who buy and sell Bitcoin for short-term profits can also move its price. Speculation can be driven by technical analysis, market signals, trends, patterns, indicators, and algorithms.
Speculation can create volatility (price fluctuations) and bubbles (unsustainable price increases) in the market.
These factors are interrelated and can have a cumulative or counteracting effect on each other.
For example,
A positive news story about Bitcoin adoption can boost sentiment and spur innovation, which can increase demand and push up the price.
Conversely,
A negative news story about Bitcoin regulation can dampen sentiment and hinder innovation, which can decrease demand and pull down the price.
What Are the Challenges for Bitcoin?
Bitcoin faces several challenges that could limit its growth potential or pose threats to its existence. Some of these challenges are:
- Scalability: Bitcoin’s transaction processing capability is limited.
Which can result in congestion, delays, and high fees in times of high demand.
The current limit is around seven transactions per second (tps), compared to thousands of tps for traditional payment systems such as Visa or PayPal.
While solutions such as the Lightning Network aim to address this issue by creating a second layer on top of Bitcoin that allows instant and low-cost transactions, they are still in development and face technical and adoption hurdles. - Security: Bitcoin relies on cryptography and consensus mechanisms to ensure the integrity and validity of its transactions and network.
However, these are not immune to attacks or failures that could compromise or disrupt the system.
For example,
a 51% attack occurs when a malicious actor gains control of more than half of the computing power on the network, which allows them to manipulate or reverse transactions.
A double-spend attack occurs when a user spends the same bitcoins twice, which violates the principle of scarcity.
A network split or fork occurs when different groups of users or developers disagree on how to update or improve the protocol, which creates incompatible versions of Bitcoin. - Competition: Bitcoin is up against other cryptocurrencies that provide comparable or dissimilar features and benefits.
Some of these competitors are Ethereum, which enables smart contracts and DApps;
Binance Coin, which powers the largest cryptocurrency exchange and ecosystem;
Cardano aims to create a more scalable and sustainable platform;
and Dogecoin, which started as a joke but gained popularity and value
due to its meme appeal and celebrity support.
These competitors could challenge Bitcoin’s dominance,
market share, and network effects.
- Regulation: Bitcoin operates in a largely unregulated and decentralized manner, which gives it freedom and flexibility, but also exposes it to legal and regulatory risks.
Different countries and regions have different approaches and attitudes towards Bitcoin, ranging from supportive to hostile.
Some of the regulatory issues that Bitcoin faces are taxation, anti-money laundering (AML), consumer protection, investor protection, and environmental concerns.
These issues could affect the accessibility, usability, and profitability of Bitcoin for users and investors.
- Adoption: Bitcoin has a relatively low level of adoption compared to its potential market size and value.
According to Statista,
there were around 73 million Bitcoin wallets in June 2021, which is less than 1% of the world’s population.
According to Chainalysis,
only 1.3% of global economic activity in 2020 involved cryptocurrencies, of which Bitcoin accounted for 76%.
According to Ark Invest,
only 0.5% of institutional investors allocated funds to Bitcoin in 2020.
These figures indicate that there is still a lot of room for growth and improvement in terms of Bitcoin adoption.
What Are the Opportunities for Bitcoin?
Bitcoin also has several opportunities that could enhance its value proposition and increase its price. Some of these opportunities are:
- Innovation: Bitcoin is constantly evolving and improving through the efforts of its developers, users, and community. New features and solutions are being developed and implemented to address the challenges and limitations that Bitcoin faces, such as scalability, security, privacy, and usability. For example, Taproot is a major upgrade that was activated in November 2021, which enabled more complex and flexible smart contracts, enhanced transaction privacy, and improved network efficiency.
- Adoption: Bitcoin has a huge potential to increase its adoption among various segments of the market, such as retail users, merchants, institutions, governments, and central banks. Retail users can benefit from using Bitcoin as a global, borderless, censorship-resistant, and inflation-resistant currency that can store and transfer value. Merchants can benefit from accepting Bitcoin as a payment method that can reduce costs, increase sales, and attract customers. Institutions can benefit from investing in Bitcoin as a digital asset that can diversify their portfolio, hedge against inflation, and generate returns. Governments can benefit from adopting Bitcoin as a reserve asset that can enhance their sovereignty, stability, and security. Central banks can benefit from issuing their digital currencies (CBDCs) that are compatible or interoperable with Bitcoin.
- Regulation: Bitcoin can benefit from a more favorable and consistent regulatory environment that can provide clarity, legitimacy, and protection for its users and investors. Regulation can also create new opportunities for innovation and collaboration between the public and private sectors. El Salvador, for example, became the first country to embrace Bitcoin as legal tender in June 2021, allowing individuals to use it as a medium of trade, store of value, and unit of account. The government also partnered with Strike, a Lightning Network-based payment app, to facilitate the adoption and use of Bitcoin in the country.
- Sentiment: Bitcoin can benefit from a more positive and widespread public perception and attitude towards it.
Sentiment can be improved by increasing awareness, education, and engagement among the general public, media, celebrities, influencers, and opinion leaders.
Sentiment can also be boosted by highlighting the social and environmental benefits of Bitcoin, such as financial inclusion, empowerment, innovation, philanthropy, energy efficiency, and renewable energy. - Speculation: Bitcoin can benefit from a more rational
and sustainable trading activity and behavior among speculators who buy
and sell it for long-term profits rather than short-term gains.
Speculation can be moderated by reducing volatility, bubbles, and crashes in the market.
Speculation can also be supported by increasing liquidity, volume, and depth in the market.
What Is Our Prediction for 2023?
Based on our analysis of the drivers, challenges, and opportunities that affect Bitcoin’s price,
we have developed three scenarios for 2023:
- Bullish scenario: This scenario assumes that all the positive factors outweigh the negative factors and that Bitcoin achieves a high level of innovation, adoption, regulation, sentiment, and speculation.
In this scenario,
we predict that Bitcoin will reach a new all-time high of $250,000 by the end of 2023, representing an 8/10x increase from its current level. This scenario is based on the assumption that Bitcoin will continue to benefit from the network effect, the institutional demand, the innovation in the crypto space, and the favorable macroeconomic environment.
- Neutral scenario: This scenario assumes that the positive and negative factors are balanced and that Bitcoin experiences a moderate level of innovation, adoption, regulation, sentiment, and speculation. In this scenario, we predict that Bitcoin will fluctuate around its current level of $25,000, with occasional spikes and dips. This scenario is based on the assumption that Bitcoin will face some challenges such as scalability issues, regulatory uncertainty, competition from other cryptocurrencies, and market volatility.
- Bearish scenario: This scenario assumes that the negative factors outweigh the positive factors and that Bitcoin suffers from a low level of innovation, adoption, regulation, sentiment, and speculation. In this scenario, we predict that Bitcoin will drop to $5,000 by the end of 2023, representing an 80% decline from its current level. This scenario is based on the assumption that Bitcoin will face some threats such as hacking attacks, legal bans, technical failures, negative media coverage, and loss of confidence.
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