What can the past tell us about the future of Bitcoin?

Bitcoin has lost more than 50 percent in the last six months, but cryptocurrency holders are used to volatility. Here we look at how the FT has covered bitcoin’s previous booms and dips to see if history repeats itself.

Japanese boom and fall (April 2017 – March 2018)

Before 2017, bitcoin was trading below $1,000. But in the New Year of 2017, the cryptocurrency surpassed the $1,000 mark and was within touching $20,000 before the end of the year.

The explosion was triggered by intense interest, first in Japan and then in South Korea. Small investors began to gamble on bitcoin, which was attracted by premium television commercials and billboards boasting high returns. After Japan allowed trading on 11 crypto exchanges in April 2017, the country accounted for about 40 percent of daily trading activity worldwide.

But soon after, an accident came. At the beginning of 2018, the so-called bitcoin “whales”, the largest holders of the cryptocurrency, began to cash in to take advantage of the high prices. Then, the mood broke when Japanese exchange Coincheck was hacked and lost $530 million in XEM, another popular cryptocurrency.

Line chart of Bitcoin Price in ($) showing how Japan is driving the bitcoin market

While Bitcoin wasn’t stolen, the hack angered small investors who were worried about the safety of holding digital coins, especially after Japan’s financial regulator raided Coincheck’s offices in February.

First bitcoin winter (March 2018 – May 2019)

Between March 2018 and May 2019, Bitcoin traded below $10,000 as critics and regulators expressed doubts about its future.

In London, for example, merchants and institutions have been cautious about engaging in cryptocurrencies due to fears of fraud, financial crime and other reputational risks.

A fire sale by bitcoin whales in early 2018 has raised concerns about the impact of large accounts on the cryptocurrency’s price. In April 2018, approximately 1,600 bitcoin wallets held about a third of all available bitcoin. Of these, 100 wallets contained more than 10,000 bitcoins.

For example, Cameron and Tyler Winklevoss, who are known for unsuccessfully suing Mark Zuckerberg for the idea that evolved into Facebook, were some of the biggest whales to buy 120,000 bitcoins reported in 2012.

After a fight over a fork in the cryptocurrency as new versions of Bitcoin were created, winter deepened, sending the price to its lowest level since early 2017.

Line chart of bitcoin price in ($) showing 2017-19: crypto is out in the cold

But in June, bitcoin received support from an unexpected source: Facebook. The world’s largest social media company has announced its plans for its own digital currency, Libra. While Libra ultimately remained just a dream, news of Facebook’s plans to enter the industry has boosted confidence in bitcoin’s sustainability.

Pandemic outbreak (October 2020 – April 2021)

After the initial shock of the pandemic, Bitcoin started gaining ground after PayPal announced that it would allow users to hold cryptocurrencies.

Stuck in quarantine and with government incentive controls to spend, retail investors began gambling on bitcoin’s rise. In six months, the cryptocurrency went from under $12,000 to over $63,000.

The steep climb also caught the attention of institutional investors, and excitement peaked with the IPO of Coinbase, the largest crypto exchange, which opened on the Nasdaq in April 2021 with a valuation of approximately $76 billion.

Line chart of bitcoin price in ($) showing 2020-21: pandemic escalation

But the high did not last long. China banned crypto mining, which is the use of computers to solve puzzles to earn cryptocurrencies, in September 2021, though activity has rapidly shifted to other countries.

Then the US and Europe raised the possibility of reorganization.

Finally, day traders have been caught in a spree of meme stocks, many of whom are pulling cash from their bitcoins to play the stock markets, and more fears have been expressed about the environmental cost of crypto mining, including by Elon Musk. Bitcoin dropped just below $30,000 in late July.

Bitcoin suffers as stock markets fall (from July 2021 to present)

Bitcoin fans initially insisted that it was a hedge against inflation and immune to fluctuations in other markets.

In October 2021, the cryptocurrency went fully mainstream with the launch of an exchange-traded fund that allows investors to get exposure to its rises and falls without directly holding any bitcoin. Days after the ETF began trading, bitcoin hit an all-time high of around $69,000.

But as a mainstream asset, their wealth has become much more in line with broader market sentiment.

Line chart of Bitcoin price in ($) shows Bitcoin hitting all-time high before falling

In early December, rising inflation in the U.S. economy and fears about future interest rate increases saw the price of bitcoin plunge drastically, and in the months that followed, bitcoin fell in line with the decline in U.S. tech stocks.

As inflation worsened this year, bitcoin suffered more and had its worst week since 2020 in June. ProShares, the company behind the first bitcoin EFT, has launched a new fund to capitalize on bitcoin’s decline.

What’s next?

Bitcoin’s previous booms have all been fueled by small investors flocking to the market hoping to make substantial profits in a short time. Concerns about the risks of subsequent crashes, regulators, the broader market, or the industry encouraged bitcoin holders to cash out.

These trends seem likely to continue. As Katie Martin, author of FT’s Long View column, puts it, bitcoin is “the most speculative asset on the planet, possibly the most speculative asset of all time.”

Looking ahead, it remains largely unclear how future rules regarding cryptocurrency will work in practice, even though regulators have promised to be “brutally difficult.” But there is more evidence of consensus, and if regulators are successful in setting the rules, they will help the crypto industry build more trust and perhaps eventually provide some stability.

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