Key Points
- Bitcoin finished the year down about 64%, marking its worst annual performance since 2018.
- This bear market is different: for the first time in Bitcoin’s history the broader economy is also in recession.
- Bitcoin’s correlation with the stock market is very high, demonstrating that it has been trading like a high-risk asset.
- Many hoped that this correlation would break, but for now it creates a daunting macro backdrop for Bitcoin and has contributed to its sharp price decline this past year.
Cryptocurrency investors will be glad to put the disastrous year of 2022 behind them.
Prices across asset classes fell as the world shifted to a new interest-rate paradigm. The era of low rates and cheap money ended, risky assets were crushed, and there was little appetite for high-risk exposure such as crypto.
Looking at Bitcoin, the world’s dominant digital currency closed the year near $16,547, down from about $46,311 at the start of the year — a decline of roughly 64%. For an asset known for explosive gains and steep losses, how historically bad is that performance?
2022: Bitcoin’s second-worst year on record
Examining annual returns back to 2011, the first year with sufficient liquidity and price data, shows that Bitcoin’s 64% drop in 2022 ranks as the second-worst yearly decline on record, behind only the 72% fall in 2018. That prior collapse followed the parabolic run-up to nearly $20,000 in late 2017, when Bitcoin first entered the mainstream spotlight.
Against that context, one might ask whether 2022 is simply “one more bad year” before another recovery. Bitcoin has fallen many times and later rebounded — but this time the situation includes a significant caveat.
Bitcoin faces a recession for the first time
Satoshi Nakamoto released the Bitcoin whitepaper in 2008 as a response to the global financial crisis. The genesis block even referenced a headline from The Times: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
Bitcoin’s early trading years were shaped by the post-crisis environment: near-zero (and in some places negative) interest rates, aggressive money printing, and strong returns across risk assets. A quick look at stock market returns since Bitcoin’s launch shows that until recently markets enjoyed favorable conditions.
For the first time in its history, Bitcoin is now experiencing a downturn while the broader economy is in recession. Central banks have shut off the printing presses and raised rates aggressively; the Federal Reserve’s funds rate is in the 4.25%–4.50% range.
This matters because, despite claims by some Bitcoin evangelists, price data clearly show Bitcoin trading like a high-risk asset. Its correlation with the S&P 500 has been very high — and climbed further after rate hikes began in April 2022 — as discussed in previous analysis and illustrated in the chart below.
This bear market is not like the others
That high correlation is why confident predictions of a quick rebound, based on earlier bear markets, are overly optimistic. The world today is different from prior chapters in Bitcoin’s history. A market driven only by free money cannot persist indefinitely, and Bitcoin must now prove its resilience under tougher macro conditions.
Bitcoin is often compared to gold, but gold has a long track record as a hedge and reliable store of value through extended periods of uncertainty. Historical returns for gold show appreciation during turbulent times — the kind of behavior investors seek when preparing for a recession.
Unfortunately for Bitcoin, its strong correlation with equities means it has not behaved like a safe-haven asset. Supporters hoped that link would break; whether it can remains debated. For now, Bitcoin is far from being a reliable store of value.
If the Federal Reserve eases and rate hikes are rolled back, risk assets could rally again — and technology stocks and Bitcoin would likely be among the big beneficiaries.
Over the long term, the central question is whether this correlation can be broken and whether Bitcoin can ultimately achieve the widely sought status as a dependable store of value.