, 2 years ago

Bitcoin at all time high – what to make of the frenzy

Bitcoin is not only the first technology that introduced the blockchain and aims to be the money of the internet, but it is also the most successful asset in the 21st century in terms of its price development. It has created a lot of innovation in the financial system, but apparently the most interesting factor to many people is its thriving market that is known for its massive volatility.

In this article we like to share some thoughts on Bitcoins last all time high and why it is more attractive to buy when prices are higher instead of buying an all time low.

BTC market is cycling

Some say that technical market analysis is completely bogus and cannot be scientifically proven. But there are still patterns that can be described. In the case of Bitcoin, the market is working in cycles. Meaning that it is repeating a certain pattern since Bitcoin’s invention. If you take a close look at what mayor news outlets had to say about BTC in the past years, you will find some shocking coincidence with the cycles that BTC is repeatedly going through.

Once Bitcoin is entering a bullish phase all mayor papers start to write that this is a bubble that is about to burst soon enough. If BTC is going through a bear market they even confirm their objections by declaring that Bitcoin is already dead. If you take your time and start searching the web for articles in the past 5 years, you will find that this is a phenomenon not only in the international news media, but also with local papers and smaller outlets.

But what does this tell us about market cycles?

Once BTC reaches an all time high it is on the verge of continuing its trend or to break down for a serious correction that is taking a couple years. With that mind let’s take a closer look at the year 2017.

Bitcoin’s all time high – How 2017 blew out of proportion

While BTC had seen only little interest from the main stream media and big financial institutions, that all changed in December 2017 with BTC reaching its past all time high of roughly 20.000 US-Dollars. All of a sudden it became clear that this market had the potential to grow even bigger. But many investors felt betrayed, because Bitcoin fell within a couple of weeks and reached its temporary all time low in February 2018 hitting the floor at 6.000 US-Dollars.

While this was hurtful to many traders especially in the derivatives market who dealt with high leverage, it had less impact on traders in the spot market who simply held BTC in their respective portfolios. In fact, it was healthy that the market was entering a bearish trend for redistribution and allowing more investors to get in.

The crucial point is that the year 2017 was the climax of a cycle that Bitcoin went through a couple of times before. But it was only this time when many analysts woke up to this effect and started analysing why this is happening repeatedly.

Bitcoin halving as a driving factor

One of the reasons why Bitcoin is going through these cycles is the so-called halving. It is almost a non-event in terms of price when it actually happens and it is deeply rooted in Bitcoins technology. Every 210.000 blocks the so-called block reward is split in half. While Bitcoin has a limit of 21 Million BTC that will ever come to existence, it has a slight inflation. Every time a new block is mined the miner is rewarded with the block reward and the fees.

The block reward is a crucial economic function. It determines the total supply of BTC and it is the incentive for miners to run their equipment and securing Bitcoins blockchain and all the transactions within. What the halving essentially does is that it makes BTC scarcer, because less new BTC are created and therefore it is with each step harder to come by and get more of it.

Due to the average block time of about 10 minutes the halving is commenced ever 4 years. And this is the point where market cycles come into play.

The year 2020 – BTC at all time high again

The years after the all time high in 2017 became known as the so-called crypto winter and many people where under the impression that this could last forever. But Mai 2020 it was time for another halving of the block reward. And while the market remained neutral while it happened it showed a strong bullish trend at the end of the year 2020. The result was astonishing. BTC broke through its 2017 all-time high and continued its rally through the first quarter of 2021.

A similar pattern had happened before. While the years 2014 and 2015 weren’t very successful in terms of price, the were a sudden movement in the market when in 2016 the prior halving happened. Bitcoin broke its 2013 all-time high of 1.300 US-Dollars the same year and the year after the “20k USD” party happened.

It seems that BTC went through the same cycle again during the last three years. The years 2018 and 2019 weren’t really successful and have been in fact a lengthy correction. The year 2020 brought yet another halving and BTC broke through its 2017 all-time high.

Does that mean that this market is on rinse-repeat-mode? Not quite, because other factors are also in play.

Supply and demand – the creator of all-time highs

It is basic knowledge that a market comes into existence with supply and demand. There are many theories how both economical variables play out in markets that are embedded in a more complex environment. It seems that when it comes to Bitcoin everything evolves around scarcity. While it is true that BTC comes scarcer over the years this has nothing to do with demand.

If you draw a picture of yourself and there is only one copy, then it is safe to say that this a very rare painting. But is it worth 1 million Euros? Maybe so, maybe not. It depends on the demand for your art and who is demanding to own pictures that have been created by you.

Bitcoin is also depended on who is creating demand for BTC. The scarcest good is worth next to nothing if nobody is paying for it.

Retail investors drove the price in 2017

A look at the past betrays that the 2017 all-time high was in fact mostly driven by retail investors. Meaning that a lot of traders and long-term investors were trying to get in all at once. Leading ultimately to the cascading price in December 2017. The harsh drop in the following year and the continued bear market in 2018 and 2019 were also caused by retail investors.

Same goes for the years before that. There has been some interest by institutional investors and bigger parties to play with BTC once its invention became more known to the broader public, but it didn’t catch any significant attention from major players around the world. This is one reason why Bitcoin was considered to be the wild west show of finance. Almost no regulation, many small companies involved and nobody is really able to navigate the market.

But that has changed over the last 5 years. And the reason for that is neither retail investors nor institutional investors interested, but a major economic factor that hasn’t been on the table in the past years.

The fear of inflation has created a new all-time high

The price went up over 62.000 US-Dollars in the year 2021. And while it is in fact true that most of the demand was created by institutional investors who were entering the market at the end of the year 2020, they were driven not by the impression that Bitcoin is the best technology to invest in. They are mostly driven by the fear of loss.

Institutional investors have a created tremendous wealth over the last couple of decades for themselves and the fact that the economy is failing in the face of the corona crisis is driving them away from bonds and stocks. Some analysts expect inflations to rise up to 10% in the coming years. While this scenario would already be shocking to the average joe, it is even more scary to somebody who has to defend a lot of wealth in an environment where no real growth is created. In that sense Bitcoin is a life boat for those who try to have hard money at there disposal should everything else fail.

The possible results of the monetary policy of the economically most important countries in the world has created a situation that makes it absolute plausible to invest money into BTC, even if these investors don’t believe into Bitcoin’s vision. It is scarce, it is proven, it has a working global market and cannot be stopped or counterfeited by any actor in this world.

It is this shift that has brought up the debate again, whether Bitcoin should be seen mainly as a currency or as a store of value. Should the worst fears of analysts and experts come true, then BTC is bound to be worth millions. The only problem is that in this scenario even a million won’t have the same purchasing power as of today.


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