Will the Bitcoin Bubble Burst as It Did at the End of 2017?

While Bitcoin’s impressive 700% surge last year set historic precedents like the South Sea Company or “Tulipmania,” centuries old, you don’t really have to go that far back.

Just a few years ago, in 2017, the price of Bitcoin soared to nearly $ 20,000 in December of that year, after starting the year under $ 1,000. However, a year later the price had fallen to around $ 3,000, about 75% below its high.

Could this be what Bitcoin is expecting now, as it soared to a high of more than $ 61,000 in mid-March, down from around $ 7,000 a year ago (currently around $ 56,000)?

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The extreme volatility and uncertain intrinsic value is precisely why veteran investors like Berkshire Hathaway Vice Chairman Charlie Munger have ridiculed Bitcoin in the past as essentially pure speculation.

“For me it’s just dementia,” Munger said in his typically bitter way at the Berkshire 2018 annual meeting.

While others are not that keen on ditching the investment opportunity right away, there are still some implications that warrant caution as Bitcoin’s breakout continues towards unsustainable highs.

On this point, Ulrik Lykke, CEO of crypto-focused hedge fund ARK36, said the story was meant to teach investors not to be overly greedy, alluding to Joseph Kennedy’s famous anecdote of how he knew it was time to 1929 from the Shoeshine shoppers gave him stock tips.

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“If the market goes completely parabolic and the price hits $ 100,000 to $ 300,000 per coin, a big downturn similar to 2018 is likely to follow,” he said. “The lesson here is to know how to take profit when the price gets so high that a sale can radically change your life. In other words, if absolutely everyone, including your grandmother, is optimistic about Bitcoin, then it is probably a good time to start selling some of it. “

What’s different this time?

However, there are numerous aspects of the current bull market that differ significantly from the end of 2017 and therefore need not be viewed with such suspicion.

Perhaps most noticeable is the much higher buy-in from institutional investors. While private investors predominantly led the bull market in 2017, the institutes have outperformed retail purchases in the past two quarters, according to the JP Morgan study.

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“”[There is] There is no doubt that the institutional inflow of Bitcoin will differentiate 2020 from 2017, “the company said in a note earlier this year.

Institutional support has also helped Bitcoin’s market cap surpass $ 1 trillion, which is more than 400% above its previous peak in 2017 and has solid foundations that can prevent such a drastic decline as it did in 2017 through 2018 was observed.

“Institutional adoption of cryptocurrencies was very low in 2017, but is now increasing significantly in both the derivatives and exchange-traded funds world,” said Bob Fitzsimmons, executive vice president of fixed income, commodities and equity loans at Wedbush Securities. “The number of companies accepting and deleting cryptocurrencies has increased beyond the bridgehead phase and has entered the” virtuous network “phase in which liquidity creates liquidity.”

He added that tightening US monetary policy in 2017 and 2018 would be in stark contrast to current policy, adding a differentiation between current and past bull runs. Instead of 2017, Fitzsimmons compared the current development of cryptocurrencies to an accelerated timeline of the dot-com bubble and recovery.

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“The market history of cryptocurrencies is similar to the history of internet stocks: in the first phase of the dot-com bubble, new entrants rose and fell rapidly,” explained Fitzsimmons. “The consolidation of the industry after 2002 and the emergence of large corporations taking advantage of network efficiency have created a market dominated by highly profitable and fully accepted companies whose dominance far surpasses that foreseen in the late 1990s bubble.”

As such, he views the late 2017 crash as similar to the dotcom crash. The current move is more in line with the post-crash era, when the industry consolidated and fueled the growth of a high performing technology sector backed by some of the largest companies in the world.

ESG adds a new crease

However, many forward-thinking investors are also concerned about the future of the planet. In this regard, Bitcoin – and cryptocurrency mining in general – are against best principles, a fact that has only been reinforced since the peak of 2017.

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According to the Bitcoin Energy Consumption Index, Bitcoin’s carbon footprint is 25% higher than that of the Czech Republic and consumes about the same amount of electricity as the Philippines annually. The persistently high price makes it possible to justify high energy consumption, which exacerbates the problem.

According to a survey by the London School of Economics, 96% of companies surveyed expected to increase the prioritization of environmental, social and governance (ESG) issues in 2021, cementing the secular trend of ESG investing. Overall, this puts the cryptocurrency megatrend in the shadow of the other major paradigm shift of our time in ESG.

In this case, the 2017 differentiation comes in relation to an additional test that could jeopardize the aforementioned institutional support for cryptocurrencies and limit the bull run in similar, albeit different, ways.

Caution from China

The significant amount of bitcoin mining that is carried out in China is closely related to environmental issues testing.

Shortly before the fall of Bitcoin in late 2017, Chinese regulators tried to ban cryptocurrencies by banning ICOs (Initial Coin Offerings), and in January 2018 ended preferential policies for Bitcoin mining companies on electricity prices, taxes, and more .

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However, crackdown did not ultimately kill China’s bitcoin industry. According to Statista, 65% of Bitcoin mining was still done in China in 2020. While there were significant crackdowns on ICOs and yuan exchanges for cryptocurrencies, Chinese Bitcoin enthusiasts were able to bypass the regulations by using USDT, a dollar-pegged stable bitcoin from Tether.

The Chinese state is currently trying to undercut Bitcoin by setting up its own cryptocurrency, the digital yuan, and banning all other cryptocurrencies from being mined or circulated by Chinese nationals. This includes the stablecoins offered by Tether such as the USDT.

“Most of the Bitcoin trading takes place, not against Fiat USD, but against USDT,” JP Morgan analyst Joshua Younger recently warned in a press release. “Were there any problems that could affect the willingness or ability of both households? [Chinese] If foreign investors use USDT, the most likely outcome would be a severe liquidity shock to the broader cryptocurrency market, which could be compounded by its disproportionate impact on HFT-style market makers who dominate the flow. “

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2017 has shown that China’s raids may not be effective immediately and can be bypassed by savvy internet users, as demonstrated by the use of USDT and Bitcoin’s bull run that outlasts initial sanctions. However, the successive regulations documented by the Library of Congress in 2018 seemed to fill many loopholes and continue to damage bitcoin demand as the price per coin fell.

So, with recent moves to cancel major IPOs, restrict digital payments, and other tighter financial regulations, caution should certainly be exercised as China is able to continue cracking down on mining and stable coins.

With that in mind, some historical learning with reasonable adjustment to current realities is likely a smart move for Bitcoin investors.

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