Market Basics: The Rise (And Fall?) of Bitcoin

The market basics will continue to cover crypto currencies this week with a comparison of the different bull runs and crashes of the BTCUSD stock (Bitcoin). We will start with an analysis of the 2017-2018 bull run and screen the reasons behind it. After this, we will express our opinion about the future of Bitcoin based on earlier value movements.

Bitcoin has been the fastest growing asset class on the stock market between January 2017 and mid-December 2017 with a 2000% increase. In this time period, the digital currency hit a market capitalisation of approximately $645 billion. But what caused this surge in the price of the coin?

The most commonly agreed on reason is the notion that an entry of a high number of non-knowledgeable investors, which knew very little about the currency caused the 2017 run. One would hear stories from people selling their houses to put their liquidity into the cryptocurrency market. A humorous, yet slightly concerning statistic remains the similitude between the curve of the google searches for the key word bitcoin and the actual graph representing the price. For visual representation, please view these graphs below.

Evolution of the search for the term “bitcoin”

Source: https://cryptona.co/bitcoin-search-google-declines-since-beginning-year/

Price movement of the digital asset

source: www.coinmarketcap.com

In our opinion, this graph indicates that the typical investor take an extremely short timeslot between becoming knowledgeable on the currency and proceeding with the actual investment. Consequentially, many investors knew nothing or very little about the coin when investing in it.

But not only naïve investors, limited in their abilities to rationalise their investments caused the boom, institutional investors played their own part in contributing towards the increasing demand for the asset. During the surge, Japan’s financial services agency confirmed the passing of the legalisation of cryptocurrencies as exclusive means of payment. Some nations even launched their own cryptocurrency in response to Bitcoin, which only further contributed to the overall popularity and belief in digital currencies. Last but not least, the introduction of BTC exchange-traded funds and futures made mainstream investors believe in the financial credibility of the asset.

June 2011

The BTCUSD pair started rising in April to go from $0.95 to a price of £32 by June. This phenomenon is very much comparable to the 2017 surge, but was limited to brave investors investing in the currency, as access to cryptocurrencies was limited to only a few exchanges. When these rational traders began to take profits, a wave of capitulation started and the price had fallen back to $2 by November.

January 2012

A surprising increase in the bitcoin price materialised, surging from £4.50 to £7 in the first months of 2017. This was later succeeded by a 49% crash to £3.80. This sparked fear within some investors who had held strong during the November 2011 crash.

April 2013

The first months of 2013 were a bullish period for the asset. Prices reached an ATH (all time high) of £49 to later experience a one-day correction to £33.

A high number of newly created trading platforms contributed to a rise to £260. Informed investors were starting to take their profits, when the exit of the famous stock exchange Mt. Gox contributed to another crash. A loss of 83% led the asset back to a value of £40.

November 2013

As noticed before, bullish trends of cryptocurrencies tend to happen at year ends. This assumption can be confirmed by the November 2013 boom during which the currency topped a value of £1200. This psychologically important height led the cryptocurrence to hold its value until January 2015 where it dropped to £150.

Our opinion

It is clear that with a lack of regulation in the cryptocurrency market, whales (investors with extremely high sums invested in the market) can influence the price fluctuations to an important extent and benefit from it accordingly. The lack of transparency makes it very difficult to predict the future development of the BTCUSD pair, but as mentioned in the waves description former crashes have been experienced, with surges still occurring later.

AMSA believes that investing a small sum into popular exchanges, rather than currencies can be beneficial as trading volumes are tending to remain stable lately. Furthermore, in case a future re-gain in popularity materialises, trading fees correlated to exchange volume in crypto will increase the value of exchanges, thus benefiting exchange shareholders.

Next week

More unknown cryptocurrencies, like Ripple (XRP) or Litecoin (LTC) also went through the 2017 boom. Are you sure you know the functions behind these assets?