The Bitcoin Phenomenon

Ever since its inception in 2008 and public release in 2009, Bitcoin has been a highly controversial phenomenon. In the early days, Bitcoin had a very poor reputation in the mainstream, as it was most often discussed in connection with the dark web, where the unique properties of Bitcoin were leveraged to facilitate the infamous Silk Road marketplace, allowing users to buy a range of illegal goods with BTC.

Now, discussion surrounding Bitcoin has primarily shifted to Bitcoin’s booms and subsequent busts, which have led observers to proclaim the death of Bitcoin on several occasions. For now, the countless Bitcoin obituaries have turned out to be premature.

While Bitcoin’s extreme volatility and scalability issues have made it increasingly difficult to argue for BTC as a replacement for fiat currency, the sheer robustness of the Bitcoin network is now widely being used to make a case for Bitcoin as a store of value that could become a serious competitor to gold.

Even though there’s still a month left to go before we move on to next year, 2018 will most likely be remembered in Bitcoin history as a “bust” year. After reaching an all-time high valuation of almost $20,000 in December of 2017, Bitcoin has spent the majority of 2018 bleeding value and BTC’s current price of $3,900 represents an 83% drop from its all-time high.

“When in doubt, zoom out” is becoming a bit of a tired phrase, but it does hold some merit if we consider that extreme price drops are not at all uncommon in the history of Bitcoin. To try and gain a better understanding of Bitcoin’s current woes, let’s take a look at the five largest Bitcoin price drops in history and consider some of the causes and narratives that surrounded them.

Sources for chart: Buy Bitcoin Worldwide, 99bitcoins, CoinCodex

June to November 2011: -93%

From June to November 2011, Bitcoin plummeted from a high of $29 and finally bottomed out at $2. The largest catalyst for this crash was the hacking of Mt.Gox, by far the biggest Bitcoin exchange at the time. The exchange was compromised by a hacker who gained access to customer accounts and artificially pushed the price of Bitcoin on the exchange to $0.01.

Even though the crash to 1 cent was artificial, the hack resulted in a substantial hit to confidence in Bitcoin and played a major part in the 93% decline. Despite the hack, Mt.Gox continued to maintain its dominance and remained the largest Bitcoin exchange until its eventual collapse in 2013.

August 2012: - 56.7%

In August of 2012, Bitcoin lost more than half of its value in just 3 days after Bitcoin Savings & Trust, a ponzi scheme that promised substantial weekly payouts to its investors, halted its promised payouts. The scheme’s operator, Trendon Shavers, claimed that more than 500,000 BTC in total was deposited into the scheme. In 2016, Shavers was sentenced to 18 months in prison. According to New York prosecutors, Shavers had obtained a total of about 146,000 BTC through his fraudulent activities.

April 2013: - 73.3%

In 2013, Bitcoin had started gaining significant traction in mainstream media, and new investors were flocking onto the market. Bitcoin was on a tear, and rallied for four months before topping out at around $260 on April 10. The price then crashed, and the previously mentioned Mt.Gox struggled to handle the sheer volume of trading, causing even more uncertainty in the process.

Cyber attackers took the opportunity to create even more chaos, and started targeting Mt.Gox with DDoS attacks. While it’s likely that Bitcoin was due for a correction anyway, the chaos surrounding Mt.Gox contributed additional selling pressure and exposed the many risks of relying on a single entity as the nexus of the Bitcoin ecosystem.

December 2013 – January 2015: - 84.6%

In October of 2013, Bitcoin embarked on a monstrous rally, and surpassed the previously established all-time high of $260 in November. Bitcoin showed no signs of stopping and broke the $1,000 psychological milestone in the same month, eventually peaking at about $1,150 on December 4.

The price of Bitcoin then started undergoing a correction, which was later exacerbated when it became obvious that there were major issues going on behind the scenes at Mt.Gox, which was still the largest Bitcoin exchange in the world.

On February 10, Mt.Gox announced that it was halting all Bitcoin withdrawals from the platform due to “transaction malleability”, which Mt.Gox said was caused by a bug in the Bitcoin software. While other exchanges resumed operation, Mt.Gox was still down, prompting speculation on whether the exchange was insolvent.

Shortly after, Mt.Gox CEO Mark Karpeles resigned from the Bitcoin Foundation, and the Mt.Gox website was reduced to a blank page. On February 28, Mt.Gox filed for bankruptcy, saying that they had lost about 750,000 of customers’ BTC and 100,000 BTC of their own in a security breach.

Although there was a rally that started in May of 2014 which saw Bitcoin grow from about $440 to around $650, the second half of 2015 was decisively negative and BTC bottomed out at around $177 in January 2015. It took Bitcoin until April of 2017 to surpass its previous $1,150 all-time high.

This was the last major Bitcoin drawdown that occurred before the bear market that Bitcoin and the cryptocurrency market at large are currently slogging through.

December 2017 – unknown: -81.8%

Bitcoin's iron grip begins to slip

2017 brought a fundamental transformation to the cryptocurrency landscape, and Bitcoin’s iron grip on the cryptocurrency market began to slip. At the start of the year, BTC dominance was at roughly 85%. In March, however, BTC dominance started to decline drastically as Ethereum began taking significant chunks out of Bitcoin’s market share.

By mid-June, BTC dominance was sitting at around 38%, while ETH represented about 30% of the cryptocurrency market. At this point, “the flippening”, or Ethereum overtaking Bitcoin in market capitalization, was starting to look like a done deal. It wasn’t meant to be, as it turned out, but this certainly does not mean that Ethereum failed.

Ethereum ushers in the ICO era

Ethereum’s smart contract capabilities, combined with the fact that the platform allows users to easily issue tokens that function on Ethereum’s blockhain, provide the ideal infrastructure for initial coin offerings (ICOs). With several tokens issued by ICOs rewarding their backers with astronomical returns after hitting cryptocurrency exchanges, the ICO frenzy was in full effect as people rushed into the market in hopes of finding the next 10x, 100x or even 1000x ICO token. The positive momentum and extreme confidence did not affect just ICOs, but was evident in the market as a whole.

Bitcoin reached its current all-time high of just below $20,000 in mid-December of 2017. After peaking in late 2017 and early 2018, the cryptocurrency market has entered a strong bear market and prices have been declining for the majority of the year. This time, there was no real catastrophic event that triggered the downturn, and we have yet to find out if the historic bull run has unwinded completely or if there are lower levels still left to be explored before the cryptocurrency market can have a shot at staging a recovery.

Some parts of the cryptocurrency community argue that Tether played an important role in supporting the 2017 cryptocurrency rally with strategic issuances of USDT tokens that were used to “defend” key price levels. While the theories can be plausible, we will likely have a better understanding of what actually took place in a few years, when we can have a more objective outlook on the situation and results of any potential investigations become publicly available.

Will institutions spark the next Bitcoin bull run?

While Bitcoin has largely been the domain of retail investors, the next frontier for the world’s oldest and largest cryptocurrency appears to be institutional involvement. Major players such as Intercontinental Exchange (Bakkt) and Fidelity (Fidelity Digital Assets) are building institutional-grade infrastructure for Bitcoin trading and custody, and their platforms are planned to go live next year. Nasdaq, operators of the world’s second largest stock exchange, also have plans to launch Bitcoin futures products. Has inadequate infrastructure been the main roadblock which prevented institutions from entering the Bitcoin market in a big way? We’ll have to wait and see.