Bitcoin just keeps going up and up and up in value and many investors are now looking for the best bitcoin trading platform or best bitcoin bot to trade with. Reason enough for economic historians to take a closer look at its short history. Result: the little one has a growth spurt, from which it will not be able to be shaken off. However, short-term and also painful dips are certain.
The cryptocurrency Bitcoin, which only saw the light of day twelve years ago, is currently gaining massively in value. After just under 30,000 dollars per Bitcoin were due at the turn of the year, five days later it is already around ten percent more. And with every jump in the price, which no one can explain, the number of fans – and critics – increases. Some invest with a view to making a quick buck. Others warn and describe the digital currency as a “snowball system”. They compare the hype to the infamous tulip bulb bubble of 1637 in the Netherlands. The tulip mania is the first well-documented speculative bubble in economic history. And it is the documenters who are now taking a look at the little guy with the big muscles in light of the current Bitcoin mania.
A veritable guild of Bitcoin disciples has developed in the U.S., which is reason enough for economic historians such as those at Fortune magazine to take a critical look at the digital currency’s growth spurts, as well as its dropouts and interruptions. Result: The twelve-year-old will soon reach the level from which it is truncated again. It will then be the end of the rally. As is always the case with investment decisions, however, investors are wondering about the exact point at which the rally will be cut short. In order not to be wrong there, the Fortune authors recommend a look at history.
To do so, they have divided the bitcoin’s development into five periods – all stretches in which the price shot up massively in rapid succession, only to plummet back down again with even greater drama – usually to a level lower than the one from which it had set off on its record chase. And they identify the reasons for this rapid roller coaster ride, which are crucial for predicting the next bubble and its bursting at the end.
Their basic tone is optimistic: “Financial bubbles can be caused by overoptimism about the effectiveness of innovations,” they write. In the long run, however, innovations do pay off. As an example, bitcoin history author David Morris cites the dotcom bubble of 1999, which burst a year later, but a decade later dotcom companies began their sustained rise.
The problems scholars face when studying bitcoin history begin with determining the value of each bitcoin over the years. Many of the Bitcoin marketplaces where historical prices were set no longer exist. For example, Mt. Gox was one of the world’s largest bitcoin trading venues until 2014. It was founded in 2009 as an exchange for trading cards, rebranded as a bitcoin exchange in 2010, and by August 2013, 60 percent of the world’s bitcoin trading volume was mediated through the platform before its operators filed for bankruptcy a year later in a Japanese district court on Feb. 28, 2014.
They had gambled away. Until 2012, the authors of the first relevant historical account therefore rely on the 99bitcoins.com exchange, and for prices thereafter on CoinGecko, an online platform that tracks the value of cryptocurrencies in real time.
The Dollar Parity Day
Period one spans from February to April 2011 and is called the “DPDay,” or Dollar Parity Day. That’s when the bitcoin bull run peaked in February, with one bitcoin briefly worth more than one dollar. The rise of the cryptocurrency to this mark was of enormous importance for its development. It began back in July 2010, with Bitcoin worth just a few cents on the dollar when it was first mentioned on “Slashdot,” a news platform for tech geeks.
The post brought together relevant developers like Jeff Garzik and Jed McCaleb. The increased interest led to the price of a bitcoin rising to a dollar on Feb. 10, 2011, prompting a second post on Slashdot that attracted further attention. This basic cycle, Morris writes, is still an important dynamic of the bitcoin market: real technological or infrastructural advances drive up the price, then the price itself generates further, less sustainable growth.
The first truly wild Bitcoin bubble, and thus period two, begins a short time later with a June 1, 2011 article about the “Silk Road” market on the Darknet on the now-defunct news site Gawker. Partly devoid of facts, the article described how drugs could be bought illegally and anonymously with Bitcoin on a hidden website. It appeared immediately after several new Bitcoin exchanges opened, making it easier to buy the token.
The combination of attention and access catapulted the value of a Bitcoin from ten to nearly $30 in just one week. Then the hype collapsed, and the currency plummeted for months until it landed at little more than two dollars.
The one-thousand mark is broken
Barely three years after breaking through the dollar parity barrier, bitcoin approached another crucial threshold, cracking the $1,000 mark in late November 2013. But the price was purely speculation-driven and didn’t even last two weeks. By mid-December, it had collapsed by half. It was as if lead stuck to the price, going from low to low for two years. In January 2015, it stood at a comparatively modest $172. Prices didn’t make $1,000 for more than three years after the initial breakout.
The tear maker
The craziest of all Bitcoin bubbles to date set in with period four in 2017. It is characterized by the fact that this time investors did not target bitcoin at all. Instead, the 2017 bull run was largely fueled by a wave of newly minted so-called “alternative” cryptocurrencies that started with great expectations. The general euphoria dragged bitcoin along, landing it at $19,665 on December 15, 2017.
Contributing to its run was that a novel process known as an Initial Coin Offering (ICO) allowed the founders of the new currencies to sell their offerings directly to investors. The door was opened to speculation, with thousands of investors repeatedly confirming themselves in what they were putting their money into. Like any bubble, this one fed on itself because among investors the fear of missing out was more widespread than the common sense to see the real values behind cryptocurrencies.
Bitcoin benefited from the frenzy, but its share of the overall crypto market fell. It all ended in tears, of course. Just a week after the peak, bitcoin fell more than 25 percent. Other cryptocurrencies plummeted even further. In the long run, many of the cryptocurrency projects turned out to be brazen scams. ICOs have since been classified and prosecuted as illegal securities offerings by the U.S. Securities and Exchange Commission.
Bitcoin stood at $3164 exactly one year after its peak on Dec. 15, 2018. Even a pro like Japanese tech mogul Masayoshi Son of SoftBank reportedly lost around $130 million in the 2017 crypto bubble – allegedly from his personal fortune.
This time it’s … different?
We’re in the middle of period five. Veterans of bitcoin’s wild rollercoaster ride argue that the current run-up is crucially different. They point to the fact that ICOs are banned, preventing the worst excesses of fraudsters and their greed. Add to this a global economic crisis triggered by the pandemic, which is forcing countries into debt orgies. The consequences with conventional currencies are well known and extend to deflation.
The hope is there that digital currencies can break away from this trend. The growing presence of regulated banks and publicly traded companies across the crypto market give a whole new sense of normalcy. But bitcoin, repeat historically savvy economists, is still a speculative and risky asset. “If history is any teacher,” they write, “there will be more than a handful of steps backward on Bitcoin’s journey to the moon.”