It’s been a breakthrough year for Bitcoin. In 2020, a wave of interest from mainstream investors and institutions helped the price of the virtual currency from $ 7,200 in January to above $ 29,000 on December 31 (and then to past $ 32,700 by early January 2021). But the innovative digital asset, maintained by a decentralized swarm of so-called miners, has a long history of volatility. Most observers expect some cutbacks from that meeting sooner or later.
To understand why (or maybe when) a slump is likely, it’s worth looking back at Bitcoin’s many ‘bubble’ periods: it stretches when the price rose dramatically in a short period of time and then in most cases fell even more. ‘Bubble’ has a negative connotation, of course, signaling popular delusions and the madness of crowds. But there is a growing realization that financial bubbles can also be generated by temporary over-optimism about true innovation, which can still be rewarded in the long run. Examples include the British Railway Mania of the 1840s and the Dot-com bubble of 1999.
Supporters see the history of Bitcoin’s volatility as a matter of watching the world catch up in fits and starts, with an inevitable future. Ten years of steady growth seems to have justified that view – at least for now. But the growing pains can be really savage.
Below is a journey through Bitcoin’s memory lane.
Warning: many of the Bitcoin marketplaces (like Mt.Gox) that established the historical prices mentioned in the following text no longer exist. Even at the time, it would have been difficult to set a single price in the very small, relatively illiquid market. For simplicity and consistency, this article primarily relies on 99bitcoins.com for prices from 2009 to 2012 and CoinGecko for prices from 2013 to date.
February 2011: The Great Slashdotting / Dollar Parity Day
The Peak: $ 1.06 (February 14, 2011)
The Bottom: $ 0.67 (April 5, 2011)
The Bitcoin bull run that peaked in February 2011 was arguably the cryptocurrency’s first bubble and hugely important to its evolution. It started way back in July 2010, when Bitcoin – back then was only worth pennies per coin – was first mentioned on Slashdot, a news aggregator popular with die-hard techies. That post first brought major developers, including Jeff Garzik and Jed McCaleb, to the project. Rising interest rates then drove the price of a Bitcoin to one dollar on February 10, 2011. That day became known as Dollar Parity Day, leading to a second Slashdot post that attracted more attention.
That basic cycle is still a great dynamic of the Bitcoin market: real technological or infrastructure developments drive the price up, after which the price itself generates further, less sustainable price growth.
June 2011: The Bump on Silk Road
The Peak: $ 29.58 (June 9, 2011)
The Bottom: $ 2.14 (November 18, 2011)
The first really wild Bitcoin bubble started with a June 1, 2011 article about the dark web market Silk Road on the now-defunct news site Gawker. The article described how to buy illegal drugs on a hidden website with Bitcoin. (Beliefs at the time that Bitcoin is untraceable turned out to be vastly incorrect.) Equally important, the article followed on the heels of several early opening of Bitcoin exchanges, making the token easier to buy. The combination of attention and access sent Bitcoin from $ 10 to nearly $ 30 in just a week. When it set a pattern, it collapsed for months.
November 2013: A Thousandaire
The Peak: $ 1,127.45 (November 29, 2013)
The Bottom: $ 172.15 (January 13, 2015)
Less than three years after breaking the dollar parity barrier, Bitcoin zoomed in on another crucial threshold, cracking $ 1,000 in late November 2013. It did not take long and the price cratered by almost 50% in mid-December. This bull run is notable for its relative stickiness: Bitcoin price fell relatively gently to a new bottom in just over a year, then drove past that bottom for another year. Prices haven’t broken $ 1,000 again more than three years after the first time.
December 2017: The Widowmaker
The Peak: $ 19,665 (December 15, 2017)
The Bottom: $ 3,164 (December 15, 2018)
The most brutal and crazy of all Bitcoin bubbles to date, except it wasn’t quite a Bitcoin bubble. Instead, the 2017 bull run was largely fueled by a wave of newly minted ‘alternative’ cryptocurrencies that made big promises.
More importantly, a new process known as an Initial Coin Offering (ICO) allowed founders to sell their new offering directly to the public. That created not just one speculative mania, but literally thousands feeding off each other: The purely speculative run-up to an ICO would create FOMO – that is, fear of missing out – for the next. Bitcoin benefited from the frenzy, but its “dominance,” or share of the total crypto market, fell off a cliff as interest in “altcoins” grew.
It all ended in tears, of course. Just a week after its peak, Bitcoin fell more than 25%. Other cryptocurrencies plummeted even further. In the longer term, many of the projects that roll out ICOs turned out to be brutal fraud, and ICOs have since been widely and aggressively pursued by the U.S. Securities and Exchange Commission as illegal offerings of securities.
To give an example of how bloody things have turned out, Japanese tech magnate Masayoshi Son, of SoftBank fame, is said to have lost $ 130 million in the 2017 crypto bubble – and that was reportedly his personal money, not SoftBank’s.
This time it is … different?
Veterans of Bitcoin’s wild rollercoaster ride have argued that the current white run is different in crucial ways. (Of course we’ve heard this before.) They claim that the absence of ICOs prevented the worst excesses of scammers and their greedy signs, the US COVID stimulus can be read as a validation of the inflation hedge thesis crucial to The Attraction Bitcoin as an investment and the presence of regulated institutions and listed companies throughout the crypto market have created a whole new sense of normalcy.
But Bitcoin, it cannot be repeated enough, is still a speculative and risky asset. If history is a teacher (and it often is), there will be more than a few steps back on Bitcoin’s journey to the moon.
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