Investors have been falling in love with Bitcoin again, with the leading crypto recently announced as the best performing asset in the first quarter of 2023, up an impressive 72% since early January.
Other cryptocurrencies have been rallying too, with the second biggest coin Ethereum showing a 63% gain this year.
But it’s Bitcoin that is leading the way right now, much as it did during the crypto bull run during Covid, before falling off a cliff in late 2021.
The notoriously volatile asset fell out of favour with investors after losing more than 70% of its value over the subsequent twelve-month period, with the high-profile collapse of crypto trading platform FTX in November last year marking a low point.
Recent economic uncertainty and a mini crisis in the US banking system has resulted in a jump in the gold price, which this month broke the US$2,000 per ounce mark for the first time since March 2022.
Investors have traditionally bought gold as a hedge against an economic downturn, as its limited supply means the precious metal tends to hold its value when other asset classes fall.
But could it be that Bitcoin is being viewed in the same vein, given it also has a limited supply?
The recent crypto rally has meant the digital currency’s traditional tendency to move in line with US stocks – which have remained largely flat this year – has reduced, while its correlation with gold (up 10% YTD) has strengthened.
For much of the past year, the Bitcoin price has mirrored gold’s trajectory except for the period surrounding the aforementioned FTX collapse.
The Halving effect
Another factor contributing to the rise of BitCoin is linked to its availability.
Programming in the source code of the cryptocurrency ensures there is a limit of 21 million tokens of Bitcoin at any one time.
This supply is reduced further during so called ‘halving events’, when the reward for mining Bitcoin transactions is cut in half.
These ‘halvings’ reduce the rate at which new coins are created, lowering the available amount of new supply by 50%.
The next one is projected for March 2024, and it’s worth noting that after the last Bitcoin halving in May 2020 its value soared 500% in the subsequent 18 months.
Investors may be betting on a repeat performance, but given Bitcoin’s history of volatility, it's sure to be a wild ride.