Thursday, May 19, 2022

A brief history of Bitcoin bubbles

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It has been a disruptive year for Bitcoin. In 2020, a wave of interest from large investors and institutions helped push the price of virtual currency from $ 7,200 in January to over $ 29,000 on December 31 (then to over $ 32,700 at the start of January). But the innovative digital asset, maintained by a decentralized swarm of so-called miners, has a long history of volatility. Most observers expect some reduction in this rally sooner or later.

To understand why (or maybe when) a recession is likely, it’s worth looking back at Bitcoin’s many ‘bubble’ periods: stretching when the price has risen dramatically in a short period of time, then dropped, in most cases, even more abruptly. “Bubble”, of course, has negative connotations, which implies popular delirium and crowd madness. But it is increasingly understood that bubbles can also be generated by temporary overoptimism. true innovation it can still pay off in the long run. Examples of this include the British Railway Mania the 1840s and the dot-com bubble of 1999.

Proponents see the history of Bitcoin’s volatility as a simple matter of watching the world catch up, in spurts, with an inevitable future. Ten years of steady growth seem to have confirmed this view – at least for now. But growing pains can be really wild.

Below, a trip to Bitcoin’s past.

Caveat: Many Bitcoin Markets (such as Mount Gox) which established the historical prices quoted in the following text no longer exist. Even then, it would have been difficult to identify a single price in the very small, relatively illiquid market. For the sake of simplicity and consistency, this article is mainly based on 99bitcoins.com for prices from 2009 to 2012 and CoinGecko for prices from 2013 to present.

Feb 2011: The Great Slashdotting / Dollar Parity Day

The peak: $ 1.06 (February 14, 2011)

Low: $ 0.67 (April 5, 2011)

The Bitcoin bull run that peaked in February 2011 was arguably the first cryptocurrency bubble, and extremely important to its evolution. It started as early as July 2010, when Bitcoin – which at the time was only worth a few cents a coin – was first mentioned on Slashdot, a news aggregator popular with die-hard techies. This article first brought major developers, including Jeff Garzik and Jed McCaleb, to the project. The increased interest then drove the price of one Bitcoin to one dollar on February 10, 2011. That day became known as Dollar Parity Day and triggered a second Slashdot post it attracted more attention.

This base cycle is still a major dynamic in the Bitcoin market: actual advancements in technology or infrastructure drive the price up, and then the price itself generates even less sustainable price growth.

June 2011: The Bump on Silk Road

The peak: $ 29.58 (June 9, 2011)

Bottom: $ 2.14 (November 18, 2011)

The first truly wild Bitcoin bubble started with a June 1, 2011 post in the Silk Road darkweb marketplace on now gone Gawker news site. The article describes how to buy illicit drugs on a hidden website using Bitcoin. (Beliefs at the time that Bitcoin cannot be found turned out to be insanely incorrectEqually important, the article followed in the wake of the opening of several early Bitcoin exchanges, which made the token easier to buy. The combination of attention and access took Bitcoin from $ 10 to almost $ 30 in just one week. Then, setting a pattern, he collapsed for months.

November 2013: In Thousandaire

The peak: $ 1,127.45 (November 29, 2013)

Bottom: $ 172.15 (January 13, 2015)

A little less than three years after crossing the dollar barrier, Bitcoin rose to another crucial threshold, crossing $ 1,000 at the end of November 2013. It did not last and the price cratered nearly 50% at the mid-December. This bull run is notable for its relative grip: Bitcoin’s price fell relatively smoothly over a little over a year to hit a new bottom, then followed that bottom for another year. Prices haven’t broken $ 1,000 again for over three years after the first time around.

December 2017: The Widowmaker

The peak: $ 19,665 (December 15, 2017)

Low: $ 3,164 (December 15, 2018)

The most brutal and craziest of all Bitcoin bubbles so far, except it wasn’t really a Bitcoin bubble. Instead, the bull run of 2017 was largely fueled by a wave of newly created ‘alternative’ cryptocurrencies that made big promises.

More importantly, a new process known as Initial Coin Offering (ICO) allowed founders to sell their new offerings directly to the public. This not only created a speculative mania, but literally thousands that fed off of each other: the purely speculative rise of one ICO would create FOMO – that is, the fear of missing out – for the next. Bitcoin has benefited from the frenzy, but its “dominance,” or share of the overall crypto market, has fallen off a cliff as interest in “altcoins” has grown.

It all ended in tears, of course. Just a week after its peak, Bitcoin has fallen by more than 25%. Other cryptocurrencies have fallen further. In the longer term, many ICO deployment projects have proven to be brazen frauds, and ICOs have since been widely and aggressively prosecuted by the United States Securities and Exchange Commission illegal securities offerings.

To cite an example of how things got gory, Japanese tech mogul Masayoshi Son of SoftBank fame is said to have lost $ 130 million in the 2017 crypto bubble – and it was allegedly his personal money, not SoftBank’s.

This time it’s… different?

Veterans of the Bitcoin wild roller coaster have argued that the current white knuckle race is, crucially, different. (Of course, we’ve heard that before.) They claim the absence of an ICO has prevented the worst excesses of crooks and their greedy brands, America’s COVID stimulus can be read as validation of the inflation hedge thesis which is crucial to the attractiveness of Bitcoin as an investment, and the presence of regulated institutions and publicly traded companies in the crypto market has created a whole new sense of normalcy.

But Bitcoin, we cannot repeat it enough, remains a speculative and risky asset. If history is a teacher (and often is), there will be more than a few steps back on Bitcoin trip to the moon.

More to read absolutely financial cover of Fortune:

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