The idea of market cycles is widely accepted in the financial world. The most fundamental principle is that what goes up must come down. The main reason is that investors accumulate funds when prices are low, leading to higher prices. When the price peaks, selling pressure increases as holders try to cash in, which drives the price down.
If you bought bitcoin (BTC) in 2017 or earlier, this will sound eerily familiar. It basically describes what happened during the last rally, when BTC hit a high of $20,000. As a result, most cryptocurrency holders are watching the current market conditions with bated breath.
But so far, with the exception of a few adjustments, prices have held up or at least recovered quickly. What are the chances of this going through? Can we expect 2021 to be as good as 2017 and early 2018, or is the current streak just beginning?
Echoes of the past
In terms of similarities to 2017, there are several key parallels, the first of which is the relationship between BTC prices and half-year production earnings. Every time the reward for mining is halved, a new shortage of bitcoins is created.
The second half took place in July 2016, and bitcoin rose about 3,900% in 18 months, from $500 to a high of $20,000 before crashing. The third half was reached in May 2020, when BTC was trading at around $9,000. Nine months later, bitcoin reached a new high of about $62,000, with a 560% gain in the process.
In the same period, after being halved in 2016, the percentage increase was much smaller: until April 2017. BTC is up about 150%. If the markets follow the same pattern, they will experience an even more epic rise, followed by a sharp decline. Of course, this price movement after the price is cut in half only applies to bitcoin. But where BTC goes, other markets will follow.
There are also some correlations between the chain parameters in 2017 and 2021. According to Glassnode, a high percentage of BTC will be accumulated and stored in both 2017 and 2021. In fact, the months leading up to the 2021 bull run show that there has never been more inactive BTC than in all of history.
The number of active addresses also recently reached a record 22 million, surpassing the previous record of 21.6 million from December 2017.
Perhaps less tangible, but still relevant, is the sense of euphoria that will spill over into 2017. The surge in decentralized funding and secret token markets, the spectacle of shared memes followed by the unexpected resurgence of dogecoin (DOGE), and the general excitement surrounding crypto markets are all reminiscent of the heady days of the era of initial coin offerings.
Same… but different?
Despite the similarities, the current cryptocurrency market also has many differences from 2017, which are mainly due to the advanced level of maturity. Four years ago, cryptocurrencies were entirely managed by individual retail speculators. Speaking to Cointelegraph, Simon Kim, CEO of cryptocurrency risk fund Hashed, said that the market is operating on a completely different fundamental level:
First: The various DeFi projects create value based on a clear economic model. Secondly, we are seeing record investments from institutional investors and finally, several vegan and off-ramp investments are coming in, including PayPal and Visa, as well as large banks.
Among the banks under consideration are Goldman Sachs, Citigroup and Deutsche Bank, which recently announced their intention to integrate cryptocurrencies, generating new bullish signals. And don’t forget that Tesla has announced that it will invest $1.5 billion in BTC.
Chad Steinglass, head of cryptocurrency capital markets trading at CrossTower, detailed why inflows from institutional investors, banks and payments giants are important, and made a prediction about the kind of mainstream adoption that has been talked about for so long:
The backbone of institutional investors represents deeper pockets and longer investment horizons than the traders who fueled the 2017 run. Add to that the explosion of access to crypto markets for non-traders by fintech giants PayPal and Square, among others, and we see both a growing and deepening investor base.
The widespread use of derivatives is another factor that has driven up prices this time around. It may be hard to believe, but in 2017 only a few exchanges, mainly BitMEX and OKEx, offered futures trading. Institutional futures didn’t arrive until December 2017, when the Chicago Mercantile Exchange and the Chicago Board Options Exchange launched their own bitcoin-backed contracts.
While there was speculation at the time that these introductions had sparked the cryptowinter, there is no doubt that the availability of derivatives attracted more professional investors, which ultimately helped to drive prices up.
Of course, none of this would have been possible in 2017 given the regulatory uncertainty at the time – another factor that suggests things are different this time around.
Metrics indicate a different cycle type
The statistics also reveal some differences between the 2017 cycle and this cycle. What is particularly striking is the difference in bitcoin’s dominance. Over the course of 2017, BTC’s dominance fell sharply from 85% to 32%, its lowest level ever. The drop reflects the appetite for altcoins that arose in the wake of Ethereum’s launch and subsequent ICO boom.
On the contrary: Since BTC regained dominance of a whopping 60% in the summer of 2019, it has held near that mark pretty consistently. Ether (ETH) is also showing similar trends. After epic price increases in 2021, BTC and ETH have seen their dominance increase slightly at the expense of the broader altcoin markets. Thus, these measures suggest that a new generation of investors is less volatile and more attached to BTC and ETH as core assets.
Looks like it: Good correction? The price of bitcoin is going up again to $57,000, with institutions buying the grade.
The volatility of the Bitcoin price has also decreased somewhat in recent years, at least relatively speaking. As Bloomberg recently noted, 60-day volatility is lower today than at its last peak.
The key term here, however, is relative. At $60,000, a 5% fluctuation in price means a $3,000 fluctuation. In mid-2017, a $1,200 price would have fluctuated between $1,140 and $1,260 with a 5% variation. In terms of real gains and losses, the difference is very significant.
Another measure that needs to be considered is the replacement volume. Unlike 2017, there will be much less BTC on the exchanges in 2021. This suggests that investors are interested in holding onto the stock, making BTC more scarce for traders and driving the price even higher.
Macroeconomic outlook remains optimistic
Compared to 2017, the overall picture looks very different. Although most equity markets are outperforming under pressure from the ongoing pandemic, investors face much more uncertainty today than they did a few years ago. This has likely created a bullish option for bitcoin as a safe haven, which is also reflected in the price of gold.
Simon Peters, market analyst at eToro, believes a price drop can be avoided despite the possibility of further volatility, reports Cointelegraph : I think at some point there will be a significant correction in the bitcoin market, but not the 80-90% drop we have seen in the past. He went on to speculate about the impending postponement:
The demographics of crypto investors have changed from previous years, with greater institutional participation leading to greater capital inflows. Hundreds of millions, if not billions of dollars will be exchanged into cash purchases, and this increased liquidity will lead to greater price stability.
Moreover, the pandemic has accelerated the transition to all digital technologies. The looming prospect of digital currencies from central banks and the growing reliance on digital payments further argue for cryptocurrencies as an all-digital asset class.
When you weigh all the different factors, the argument seems to be that this bull run is a little different than the 2017 cycle. While it is highly likely that markets will eventually see further adjustments, it seems less likely that there will be a collapse as sudden and dramatic as the one in early 2018.
Nevertheless, even in a more mature state and with a completely different flavor, crypto markets are still crypto markets, and history can testify that anything is possible.
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