The bitcoin bust, one year on

A year ago this week, the price of Bitcoin peaked at almost $20,000. Since then, the biggest bubble in financial history has burst spectacularly, with the cryptocurrency losing 80 per cent of its value in a bloodletting that has taught a new generation of investors a painful lesson.

Bitcoin’s 2017 gains were stunning. Below $800 in mid-January, it had almost quadrupled by June, topping $3,000 before promptly falling back to the $2,000 level in July. And then things went completely bananas, with Bitcoin soaring to the heavens and enjoying a 10-fold gain over a five-month period.

It couldn’t continue, said the sceptics, and it didn’t. Prices finally crashed and things have been especially difficult lately: Bitcoin lost 37 per cent of its value in November alone, falling below $4,000 for the first time in two years.

Other cryptocurrencies have fared even worse, pointed out economist and long-term Bitcoin sceptic Dr Nouriel Roubini recently, with every single one having fallen between 80 and 99 per cent.

Biggest bubble

It had to happen. This was, as Roubini noted, the biggest bubble in history, with Bitcoin enjoying a 60-fold increase in the three years prior to its peak. The infamous technology bubble of the late 1990s was a mere pussycat in comparison, rising fourfold over the same time span.

Roubini’s figures were echoed by New York-based Convoy Investments; just days before Bitcoin’s peak last year, the firm noted Bitcoin’s advance had surpassed the most notorious bubble in financial history, the 17th-century Dutch tulip mania.

The cryptocurrency craze was encapsulated not only by skyrocketing prices but by the crazed behaviour that accompanies major bubbles. “I’m in, get involved”, former football manager Harry Redknapp tweeted to his army of more than 200,000 followers on Twitter, adding that he was “proper excited” about mobile cryptocurrency. Days before his fight with Conor McGregor, boxing champion Floyd Mayweather was hyping his involvement in an initial coin offering (ICO), adding that people could call him Floyd ‘Crypto’ Mayweather.

A whole raft of other celebrities, ranging from reality TV star Paris Hilton to former boxer Mike Tyson and Hollywood tough guy Steven Seagal, also got on board the cryptocurrency train. A New York Times headline, “Everyone Is Getting Hilariously Rich and You’re Not”, perfectly captured the prevailing mood.

FOMO – the fear of missing out – led to all kinds of insane stock price movements. After announcing it was buying a cryptocurrency company with no revenue, financial technology stock Longfin soared more than 1,300 per cent over a two-day period, giving it a market capitalisation in excess of $3 billion. Shares in UK firm On-Line rose fivefold after it said it was changing its name to On-Line Blockchain, while shares in Long Island Iced Tea more than quadrupled after it decided it was time to rebrand to Long Blockchain.

Bitcoin still has its devotees, who point out that the cryptocurrency has suffered a number of major market crashes in the past, before always going on to hit new highs. Bitcoin did look dead and buried after losing 94 per cent of its value in the second half of 2011, falling from $32 to $2. It suffered a 79 per cent fall in 2013, falling from $266 to $54. And between November 2013 and January 2015, Bitcoin fell from $1,166 to $170, an 85 per cent fall that was even longer and more severe than the crash of 2018.

Different

Crucially, however, the current crash is different in two respects. Firstly, sceptics could not bet against Bitcoin in the past. That changed last December, when trading began in Bitcoin futures. Professional traders were finally able to short the cryptocurrency and it was no coincidence that this coincided with Bitcoin’s price top, says Reformed Broker blogger and Ritholtz Wealth Management chief executive Josh Brown. That was “game over”, he says. “Fever broken.”


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