Three Reasons Why Bitcoin Has Rallied This Year

Bitcoin is up about 65% so far this year. So here are three reasons why bitcoin changed its tune in 2023 – and how you might want to play it.
1. The macro narrative is now in bitcoin’s favour.
The US Federal Reserve (Fed) and other central banks raised interest rates to try and tame inflation. And typically, that’s no good thing for riskier (i.e. more volatile) investments like bitcoin and growth stocks. But although the Fed has said it will keep hiking rates to bring inflation down to its 2% target, investors are calling its bluff. They think the Fed will stop hiking interest rates, or even cut them soon.
Investors have a good reason to think this. Higher interest rates would put more strain on the economy and increase the risk of more bank failures – just like we’ve seen with SVB, Signature Bank, and Silvergate this year. Banks make money by lending out customer deposits to earn a yield. Problem is, they parked a lot of that cash in longer-term government bonds to do it. The value of those bonds swings with interest rate changes. So as interest rates started to tick up last year, bond prices went down (they move in the opposite direction), and banks had to mark those assets down on their books as unrealized losses.
Unrealized losses are ok – so long as you don’t have to realize them. But if depositors start pulling their cash out of the bank all at once (a bank run), the bank has to sell those bonds (and crystalize its bond losses) to get the money. So to prevent a bigger banking crisis, the US government stepped in. The Federal Depositors Insurance Corporation (FDIC) helped depositors recover their cash. And the Fed announced its Bank Term Funding Program (BTFP), which offers US banks extra liquidity to pay depositors in the event of more bank runs.
All of this means two things for bitcoin. First, the Fed knows it can’t raise interest rates much higher from here – as that’s going to put more banks under pressure. Second, the Fed grew its balance sheet by about $400 billion in March to pay for these bank bailouts (and there could still be more). In other words, the Fed is back to printing money again. Since bitcoin is a finite digital commodity, it tends to do well when central banks create more currency. You can’t have a bank run on bitcoin, either.
Keep in mind that bitcoin is a global asset, so it can soak up extra liquidity from other central banks around the world too – not just the Fed. While the Fed’s only just started ballooning its balance sheet again, the total balance sheet size of the world’s four biggest central banks (blue line, chart below) has trended up for months. In fact, it’s increased by about 5% (or $1.3 trillion) since October of last year (grey dotted line). You’ll also notice how bitcoin tends to rally when the blue line goes up faster than normal (green-shaded areas):

Chart drawn with TradingView.
2. Long-term holders haven’t sold their bitcoin.
According to blockchain data from Glassnode, a record 68% of all the bitcoin in existence haven’t switched wallets in a year or longer (blue line, chart below). In other words, they haven’t been sold. What’s interesting is that this number climbed about 10% last year, even while bitcoin’s price came down (grey line). So if more than two-thirds of the coins aren’t being sold at bitcoin’s current price, maybe the price needs to go higher to entice some of those holders to sell?
3. Investors are buying bitcoin in anticipation of the next halving.
The fourth bitcoin halving is set to happen in about one year from now. It’s when the number of new bitcoins minted by miners (as their reward for securing new bitcoin transaction blocks) gets chopped in half. In November 2012, the reward halved from 50 coins a block to 25. It then halved again from 25 to 12.5 in July 2016, and then again from 12.5 to 6.25 in May 2020. Sometime in March-April next year, it will halve from 6.25 to 3.125. This will go on until sometime in the year 2140 when there are no more coins left to mine.
Investors usually start loading up on bitcoin just over a year before each halving, in anticipation of the big event. Not only does each halving make bitcoin’s supply less inflationary, but the hype of the event tends to drive bitcoin’s price higher as it approaches (with massive volatility along the way). At least that’s what happened in the past, according to the chart below.
So is bitcoin a buy right now?
As I wrote at the start of this post, bitcoin is already up about 65% so far this year. It wouldn’t surprise me to see it rip higher straight from here, but I’d be cautious about going all in after such a big rally. As with any volatile investment, you might want to manage your risk by buying it in smaller chunks – say, by dollar cost averaging each month or week. Another option is to try buying on red days (i.e. buying the dips). Accumulation is the name of the game here, after all, and the halving is still about a year away.
If you’re more into risk-taking, most altcoins have lagged behind bitcoin during this rally. If and when bitcoin finally decides to cool off, some of them could be due for a catch-up.
Key Takeaways:
- Bitcoin has already rallied about 65% this year.
- The macro narrative for bitcoin has got a lot better lately. Investors see bitcoin as a hedge against banking uncertainty and central bank balance sheet expansion (i.e. money printing).
- A record 68% of all the bitcoin in existence haven’t switched hands in at least a year. Investors are accumulating coins ahead of bitcoin’s next halving event (expected in March/April 2024).