Rising From the Ashes — A Tale of Bitcoin Crashes

While bull and bear markets are nothing new in the financial world, the crypto selloff in early 2018 led many investors to believe cryptocurrency days were nearing their end. Many investors once bullish on crypto were suddenly worried that this event was different from the rest. Although crashes can be painful for investors, it’s important to step back and compare this latest correction to previous ones to get a better sense of what it actually meant. The reason is whether you hold the perspective that Bitcoin is nothing but a bubble or maintain that cryptocurrency and by extension Bitcoin are now here to stay, it’s worth exploring the extremely fast drops in value and equally fast recovery the currency has experienced.

On December 17th, Bitcoin reached an eye-popping US$19,666, an increase of 60% in just 5 weeks. A month later, Bitcoin dropped to under US$10,000, and by February 6th, 2018, Bitcoin fell to just under US$6,000 a decline of 70% in 51 days (see chart 1). Many people in the industry claimed Bitcoin was dead and was months away from hitting near 0.

However, what many people often forget is that since 2012, Bitcoin has crashed and risen 13 times with many of those falls larger in percentage terms than the latest 2018 correction (See figure 1). For example, in 2013, Bitcoin began the year trading under US$50. By the end of the year, Bitcoin had seen returns exceeding a 100x as well as experienced 4 selloffs with two of those selloffs exceeding 80% (see chart 2). During this correction, prices continued to dip for over a year, and it wasn’t until early 2017 that prices regained their momentum. Even though the 2013/14 crash was one of the largest at the time, when you compare the this drop to the larger Bitcoin price in chart 1, you realize that this event was actually in absolute terms rather small. The reality is Bitcoin’s price fluctuations are still a part of its DNA and will likely be for some time to come. As a result, it’s important to look at the price of Bitcoin not in terms of the latest crash but in terms of price year over year.

Comparing Bitcoin’s All Time High Price Levels

When comparing Bitcoin’s All Time-High (ATH) price levels prior to each crash, you can observe an interesting data point. In August 2012, Bitcoin’s price hit an ATH of US$16 before crashing to US$7 in just two days. A year later, in February 2013, Bitcoin price hit a new ATH of US$49 before crashing to US$33 in one day. This trend, of Bitcoin reaching ever increasing higher prices ahead of each bear market is a development that we can observe over the life of bitcoin (see Chart 3). While the price of Bitcoin has steadily increased up, the percent change between price peak points, fluctuates. Looking at Chart 4, one can observe that 2017, was just one of 4 periods where the price of Bitcoin increased by 60 percent between peaks. On average, Bitcoin has increased by 43% between price peak points.

While on average, Bitcoin prices have lost around 47 percent of their value in each bearish wave (see Figure 1), according to Sheena Shah, a strategist at Morgan Stanley, Bitcoin prices are behaving in a “surprisingly similar” way to the Nasdaq in 2000 except on steroids. In a note to clients, Sheena wrote: “the Nasdaq’s bear market from 2000 had five price declines, averaging a surprisingly similar amount of 44 percent.” She also noted that the Nasdaq climbed 278% in 519 days in the rally leading up to its high in March 2000, while Bitcoin soared 248% in 35 days in the last leg of the latest rally to US$19, high in December, according to the report**.** She mentioned that the only real difference between Bitcoin and Nasdaq as in the case of Bitcoin, the rally happened “around fifteen times the speed.”

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Wrap Up

In the end, the latest 2018 Bitcoin selloff was nothing out of the ordinary. History shows that the top cryptocurrency has sustained much more rapid losses during a shorter period of time over the course of the past several years, and has not discouraged long-term investors. However, given the price Bitcoin and other cryptocurrencies are still largely driven by the retail market, speculative run-ups coupled with exogenous shocks, such as a major hack or new regulations being announced will likely continue to shake the confidence of the cryptocurrency community. Nevertheless, if the Nasdaq Composite Index is any indication of what is next for Bitcoin, as the crypto market continues to grow, mature and brings in more institutional money, the market will eventually stabilize and reward long-term investors.

Originally published at blog.digicor.io on June 22, 2018.

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