While 2022 has been a down year for cryptocurrencies, with Bitcoin (BTC 1.04%)the most valuable asset in the industry, losing 65%, things are taking a positive turn in 2023. As of January 21, Bitcoin is up 36% so far on the year, and bullish supporters are hoping it will It’s a microcosm of what’s in store over the next 12 months.
It’s really anyone guess where does bitcoin price go next. But a cool feature could wear this top cryptocurrency to new heights in 2023. Let’s take a closer look.
Build for speed and scalability
From its first verified transaction in January 2009 until now, Bitcoin has primarily been used only as a store of value. The defining characteristic of Bitcoin, which is that there will only ever be 21 million coins created, leads many to believe that as the demand to own it increases over time, the fixed supply translates into a higher price. The comparison you’ve probably heard is that Bitcoin is like a digital version of gold, a new way to store wealth in a world that’s becoming increasingly digital.
Moreover, Bitcoin was created with decentralization and security as non-negotiable traits. Not only are there thousands of miners around the world helping to verify new transactions on the blockchain, but Bitcoin proof of work consensus mechanism makes it almost impossible to attack the network. It’s a great setup to have.
However, Bitcoin’s lack of scalability is a problem, as it can only process 3.5 transactions per second, according to bitinfocharts.com. For Bitcoin to evolve from a store of value to a medium of exchange, it must become faster in settling transactions.
Fortunately, a Layer 2 solution, known as lightning network, is in preparation. The Lightning Network is built on top of the main Bitcoin blockchain, and it essentially creates channels between different parties who want to transact frequently with each other. For example, I could open a chain with my local cafe or my gym. Every time I buy a cup of coffee or pay my monthly dues, the balances update on the Lightning Network. These channels can be closed at any time, at which time the transaction is sent to the Bitcoin layer for final settlement.
The advantage of lightning is that it reduces the data load on the main Bitcoin blockchain, as transactions are settled much less frequently. Lightning solves the problem of speed, scalability, and cost.
A large fintech company like Block has already enabled free payments for its 49 million monthly Cash App users by connecting to the Lightning Network. Any additional news regarding the ongoing development and adoption of the Lightning Network should be watched closely in 2023, as progress in this key feature could catapult Bitcoin’s price in no time.
Macro Factors Matter
The price of Bitcoin has skyrocketed rapidly before. It increased by 1300% in 2017, 85% in 2019, 309% in 2020 and 1120% in 2021, so it cannot be completely ruled out that it will go parabolic in 2023. With the price of Bitcoin rising rapidly so far this year,”hodlers“Certainly hope the momentum continues for the foreseeable future.
However, it is difficult to overstate the importance of macroeconomic factors in the price movement of risky assets, a category to which Bitcoin firmly belongs. The Federal Reserve began to adopt a policy of monetary tightening in March last year, measures taken to curb the surge in inflation that has gripped the economy. Immediately, we saw growth tech stocks, as well as cryptocurrencies, plummet.
I am always skeptical of explanations given by so-called financial experts as to why a particular asset has gone up or down in a short period of time. But I think Bitcoin’s rally to start the year has something to do with the cooling of inflation in recent months. And that has many hoping the Fed will suspend rate hikes, or perhaps even reverse course, sometime in 2023.
A dovish central bank, a growing economy, and positive investor sentiment are key ingredients for Bitcoin to continue its ascent throughout the year. While progress with the Lightning Network is certainly something to watch, at least for now, Bitcoin’s price is entirely dependent on short-term investor enthusiasm.