The cryptocurrency market is currently in a bad state as there are more and more problems and there seems to be no signs of easing.The price of Bitcoin has fallen by 75% since its previous historical high, but it may still fall further
The cryptocurrency market is currently in a bad state as there are more and more problems and there seems to be no signs of easing.
The price of Bitcoin has fallen by 75% since its previous historical high, but it may still fall further.
Compared to previous revisions, the economic recession may become worse before it improves and may continue for a long time.
For a period of time, Bitcoin (BTC USD) has been in a cryptocurrency winter, and the image above this article perfectly illustrates this. Although the global market seems to have recovered in the past few weeks, cryptocurrencies do not seem to have relaxed, and bad news for Bitcoin and cryptocurrency investors is constantly emerging. Of course, the most noteworthy is the sudden bankruptcy of FTX (FTT-USD), which may have a negative impact on Bitcoin in the near future and may even trigger a greater crisis.
The similarities between past events and today
This is not a completely unprecedented situation. Bitcoin has encountered problems in the past, such as in 2014. Most Bitcoin investors may have heard of Mt. Gox. Mt. Gox is a large currency exchange that once handled approximately 70% of Bitcoin transactions worldwide. In the years prior to 2014, the exchange had already encountered some hacker attacks and leakage issues, but in February 2014, the company went bankrupt due to software vulnerabilities that led to the theft of Bitcoin. A company like this, which handled 70% of global transactions in 2014, may be a more significant negative event compared to the recent FTX decline in Tecoin.
The Mt. Gox incident triggered or at least strongly exacerbated the sharp drop in Bitcoin prices that occurred between 2013 and 2015. Let's take a look at what happened between 2013 and 2015 and compare it with the current situation.
Figure 1: Bitcoin price development over the past few years (logarithmic)
As we can see in all the charts, the current pullback looks terrible, but it is still not as bad as in 2013-2015. Now let's digitize these revisions and see what has happened in the past compared to today.
Comparison of Bitcoin Prices in the Past
The following figure is a table of major Bitcoin crashes and reductions. This table provides a good overview of price development
Table 1: Major Bitcoin Crashes
Let's take a look at the development of these prices. In 2013-2015, the price dropped from a high of $1242 in 2013 to a low of $170 in January 2015. The decline exceeded 86%. The first adjustment in this table was caused by Mt. Gox security vulnerabilities, which are more severe in percentage terms, but the price is still at a very low level compared to now.
From the table, we can clearly see that for more severe revisions (2013-2015 and the end of 2017), it took more than a year for Bitcoin prices to reach their lowest point, and more than three years to reach historical highs.
Currently, Bitcoin has dropped from its high of $68789 in November 2021 to its current level of $16750. This has decreased by 75%. If we expect today's situation to be comparable to the situation from 2013 to 2015, and the decline is equal in percentage, then there is still room for Bitcoin to fall slightly below $10000. Compared to the correction that began in 2017, Bitcoin must fall to around $12500 to make up for the percentage of these losses.
Similarities and differences
There are many similarities between the situation of Bitcoin in 2014 and now:
A large exchange went bankrupt (it was Mt. Gox at the time, now FTX)
Due to these issues, people have been discussing systemic risks in the crypto market, but adding this risk today may spread to the "conventional" financial markets
The price development has always been poor
But there are also some signs that the current situation is significantly different from the situation from 2013 to 2015.
The Mt. Gox disaster occurred at the beginning of the price collapse from 2013 to 2015, and by the time the FTX bankruptcy occurred, Bitcoin prices had already dropped significantly from historical highs.
The disaster of Mt. Gox can be said to be much more severe, as the exchange handled about 70% of global Bitcoin transactions during its heyday.
From 2013 to 2015, the world was still recovering from a severe financial crisis that severely weakened people's trust in financial institutions. In hindsight, this may be the main factor driving the popularity of cryptocurrencies.
Since 2015, both interest rates and inflation rates have significantly increased.
How do interest rates and inflation affect the prices of Bitcoin and cryptocurrency?
Figure 2: Inflation rate development in some major economies
Let's take a look at the inflation rate first. The above figure depicts the inflation rates of some of the world's most important economies (the United States, China, Germany, Japan, and the United Kingdom). As we can see, there is a huge difference here: "Western" inflation (in the United States, Germany, and the United Kingdom) has sharply increased, while "Asia" (in China and Japan) has remained relatively stable. But overall, global inflation has rebounded since 2021 and is definitely higher than the levels from 2013 to 2015, during the previous cryptocurrency winter.
In theory, Bitcoin serves as an inflation hedge tool. I will represent the theoretical world in italics because so far, there is not enough data to confirm this. However, when there is a universal time of legal tender inflation (and the central bank raises interest rates), let's consider the force between the cryptocurrency market and the money market:
The inflation of Bitcoin is very limited as the existing quantity of Bitcoin has been mathematically determined and has grown slowly. In fact, due to the loss of some Bitcoins, there may even be deflation. If there is a fiat currency experiencing inflation, then in the long run, the price of Bitcoin should rise relative to this fiat currency.
But in the current situation, as almost everyone needs fiat currency, investors will reduce liquidity due to this inflation, which may have spread to the cryptocurrency market.
Interest rates also play a role here: if the interest rate of fiat currency is lower than the inflation rate (which is currently the case), it may make cryptocurrency investments more interesting. If interest rates are higher than inflation rates (which may become a reality in the future), fiat currency bonds will be more interesting for investors than cryptocurrencies.
In the short term, the spillover effect of fiat currency inflation may have a negative impact on the cryptocurrency market, but in the long run, if inflation remains high for a long time (and the central bank still lags behind the curve), this may have a positive impact on the development of cryptocurrency prices.
Time scale and conclusion
Perhaps more important than how much the Bitcoin price has fallen is how long the cryptocurrency winter will last. But I cannot directly answer this question. If we compare the current situation with the situation from 2013 to 2015, it took Bitcoin one year and seven months to reach a low, and more than three years to reach a new high. It is not surprising that Bitcoin is expected to reach a new low around mid-2023 and return to its previous high before the end of 2024. That is to say, if the situation is comparable and history repeats itself. That is to say, if Bitcoin returns to its previous historical high, some people are skeptical about it.
Of course, history does not repeat itself, but it often rhymes, and the situation from 2013 to 2015 is not entirely comparable to the current situation. What is completely different now is the inflation, interest rates, geopolitical situation, and the fact that we have not yet recovered from the financial crisis.
As I mentioned in this article, inflation may have a short-term negative impact on cryptocurrencies, but it can have a long-term positive impact. Compared to previous revisions, Bitcoin prices are likely to fall below $10000 and may continue until the end of 2024, before we can see a new historical high (if any).
But I still see the potential of Bitcoin and cryptocurrencies in the future financial system, and although the cryptocurrency market may be particularly brutal, prices may experience a significant recovery in the medium to long term. An interesting catalyst may be the transition of Bitcoin from proof-of-work to proof of equity (if any). Also, please note that in this article, I almost only focus on Bitcoin, but most other cryptocurrencies are influenced by the factors that come into play here. In fact, compared to Bitcoin, other cryptocurrencies, especially Ethereum (ETH-USD), have become increasingly important, as you can see on the Bitcoin Advantage Chart here.
Last but not least, remember that investing in cryptocurrencies carries significant risks, so it is recommended not to use leverage or invest more than you can afford.
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