A little bit of history repeating? The numbers behind Bitcoin’s bull run
The idea of market cycles is widely accepted in finance. The most basic principle is that what goes up must come down. The underlying rationale is that investors will accumulate when prices are low, causing prices to rise. As the price reaches a peak, sell pressure will take over as holders seek to cash out, thereby pushing the price back down.
If you bought Bitcoin (BTC) in 2017 or earlier, this will sound eerily familiar. It essentially describes what happened during the last bull run when BTC hit a high of $20,000. Therefore, most crypto holders are watching the current market conditions with bated breath.
But so far, apart from a few corrections, prices have held, or at least swiftly regained the losses. What are the chances it will continue? Can we expect 2021 to play out similarly to 2017 and early 2018, or is the cycle of the current run only just starting?
Echos of the past
In terms of the similarities between now and 2017, there are some critical parallels, the first of which is the relationship between BTC prices and the mining reward halvings. Each time the mining reward halves, it introduces new scarcity to Bitcoin’s supply.
The second halving was in July 2016, and within 18 months, Bitcoin had climbed around 3,900%, rising from $500 to a high of $20,000 before crashing. The third halving was in May 2020 when BTC was trading around $9,000. Nine months later, Bitcoin was able to reach a new all-time high at around $62,000, gaining 560% in the process.
In the same period following the 2016 halving, the gains were significantly less in percentage terms, with BTC having risen around 150% by April 2017. If the markets follow the same pattern, they will witness even more epic increases followed by a sharp crash. Of course, such price movements after a halving only apply to Bitcoin. But where BTC goes, the rest of the markets tend to follow.
There are also some correlations between on-chain metrics in 2017 and 2021. Both 2017 and 2021 show a high percentage of BTC being accumulated and held, according to Glassnode. In fact, the months in the run-up to the 2021 bull run show that more BTC was being held inactively than at any time in history.
Active addresses have also recently hit an all-time high above 22 million, beating the previous high of 21.6 million, which occurred in December 2017.
Perhaps less tangible but still relevant is the sense of euphoria that echoes back to 2017. The ballooning markets for decentralized finance and nonfungible tokens, the meme stocks spectacle followed by an unexpected resurgence of Dogecoin (DOGE), and the general excitement around the crypto markets are all reminiscent of the heady days of the initial coin offering era.
Same… but different?
Despite the similarities, there are also many differences between the crypto markets now compared to 2017, mainly relating to an advanced state of maturity. Four years ago, crypto was entirely the preserve of individual retail speculators. Speaking to Cointelegraph, Simon Kim, CEO of crypto venture fund Hashed, said that the “market is running on a completely different fundamental,” adding:
“Firstly, various DeFi projects are creating value based on a clear business model. Secondly, we’re seeing record active investment by institutional investors, and finally, various on-ramps and off-ramps including not only PayPal and Visa but also large banks, are now emerging.”
The banks in question include Goldman Sachs, Citigroup and Deutsche Bank, which have all recently announced plans to integrate cryptocurrencies, creating further bullish signals. And don’t forget the boost that came from Tesla announcing that it had invested $1.5 billion into BTC.
Chad Steinglass, head of trading at crypto capital markets firm CrossTower, elaborated on why the entry of corporate investors, banks and payments giants is significant and made a prediction on the kind of mainstream adoption that’s been discussed for so long:
“The foundation of institutional investment constitutes deeper pockets and longer investment horizons than the traders who fueled the 2017 run. Add to that the explosion in access to crypto markets for non-trader participants through fintech giants PayPal and Square, amongst others, and we are seeing both a widening and a deepening of the investor base.”
The widespread availability of derivatives is another factor that helped drive prices this time around. It may be hard to believe, but back in 2017, there were only a few exchanges, mainly BitMEX and OKEx, offering futures trading. Institutional futures offerings only arrived in December 2017 when the Chicago Mercantile Exchange and Chicago Board Options Exchange both launched their own Bitcoin-backed contracts.
Although there was some speculation at the time that these launches precipitated the start of the crypto winter, it’s undoubtedly the case that the availability of derivatives has attracted more professional investors, ultimately helping to push prices.
Of course, none of the above would have been possible in 2017, given the amount of regulatory uncertainty that existed at the time — another factor that points to things being different this time around.
Metrics point to a different kind of cycle
The metrics also point to some differences between the 2017 cycle and this one. One that stands out is the variance in Bitcoin dominance. Throughout 2017, BTC’s dominance dropped dramatically from 85% to a low of 32% — which is the lowest point it’s ever been. The fall reflects an appetite for altcoins, which came on the back of Ethereum’s launch and the subsequent ICO boom.
In contrast, since BTC recovered to 60% dominance in the summer of 2019, it has been holding pretty steady around that mark. Ether (ETH) has also shown similar patterns. Since the epic price rises of 2021, both BTC and ETH have seen small increases in dominance at the expense of the broader altcoin markets. Therefore, these metrics imply that the new generation of investors is less fickle and more committed to BTC and ETH as flagship assets.
Bitcoin price volatility has also decreased somewhat over recent years, at least in relative terms. As recently noted by Bloomberg, rolling 60-day volatility is lower now than it was during the last peak.
However, the term “relative” is key here. With a price of $60,000, a 5% price fluctuation results in swings of $3,000. At the mid-2017 price of $1,200, a 5% movement would have seen prices swing between $1,140 and $1,260. In terms of real profits and losses, the difference is chasmic.
Exchange flow volume is another metric worth considering. In contrast with the 2017 bull run, far less BTC is being put through exchanges in 2021. This indicates investors are keen to keep holding, making BTC scarcer to traders and driving the price even higher.
Macro outlook remains bullish, still
Zooming out, the big picture looks vastly different now compared to 2017. Although much of the stock market has fared better than expected under the pressure of the ongoing pandemic, investors face far more uncertainty now than they did years ago. This has likely created a bullish case for Bitcoin as a safe haven asset, which is also reflected in gold prices.
Simon Peters, a market analyst at eToro, believes that while there may be further volatility, a price crash is perhaps avoidable, telling Cointelegraph: “I think at some point there will be a significant Bitcoin market correction but not the 80%-90% declines we have seen in the past.” He went on to provide reasoning for the upcoming shift:
“The demographic of crypto investors has changed versus previous years, with more institutional participation, leading to greater capital inflows. Hundreds of millions, if not billions, of dollars are being exchanged in single purchases, and this increased liquidity will lead to more stable prices.”
Furthermore, the pandemic has accelerated the transition into all things digital. The looming prospect of central bank digital currencies and a growing dependence on digital payments creates an even more powerful case for cryptocurrencies as an entirely digital asset class.
If we weigh all the various factors, it seems that the argument for this bull run being somewhat different from the 2017 cycle is more compelling. Although it’s highly plausible that the markets will undergo further corrections at some point, it appears to be less likely that there will be a crash as sudden and dramatic as the one that occurred in early 2018.
However, even in a more mature state and with a very different flavor, the crypto markets are still the crypto markets, and history can confirm that anything is possible.