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Mind Of Mav
Why Bitcoin’s ATH Is Different In 2021 Vs 2017
Almost every other day Bitcoin is reaching a new all-time-high (ATH) — with a yearly closing price of $29,100 in December 2020. This comes after the previous high of $19,800, reached 3 years prior. Welcomed with renewed enthusiasm and the usual speculation on a future price, Bitcoin is once again under the spotlight. The fact that Bitcoin continues its growth is a confirmation of it being increasingly legitimized. Bitcoin’s ATH in 2021 is indeed much different than it was in 2017. Fueled unregulated speculation in ICOs, the previous ATH was inconsistent with organic growth and state of technology at the time and as such unsustainable. Many critics were happy to see their bearish prediction fulfilled in 2018 and 2019 when the price dropped consistently: “see? It’s just a bubble… I was right!”
During the same time, many countries started a complex process of regulation and institutional investors began eyeing Bitcoin as a very interesting alternative to traditional assets. Since its inception, Bitcoin went — and IS going — through continuous developments to improve the network (e.g. to enhance the pace of transactions, reduce fees, and increase privacy and security). These and many other factors make this new ATH completely different from the previous. What changed?
Let’s analyze some of the factors.
1. Technological Maturity and Acceptance
The introduction of any new technology, especially one as disruptive as Bitcoin, is initially accompanied by hype. Only after time has passed and the hype has faded can the technology be fully evaluated and eventually introduced in the market.
In 2017, a $20k Bitcoin was mostly the result of hype and Fear Of Missing Out (FOMO): early adopters were intrigued by the promises of this new technology, but the majority of interest really came from speculators. Four years later, after a 2 years consolidation period and renewed growth, Bitcoin has lived through its initial hype and can now position itself as increasingly mature, both from a legislative and technological point of view. To its favor, Bitcoin and the open-source technological stack it relies on should not be seen as a “static technology”, for its development is continuous and improvements are frequently released — even some that drastically alter the characteristics of the network.
The graph below illustrates the typical innovation adoption lifecycle. Bitcoin has not yet been adopted by most early adopters and is sparking interest from an early majority of users that now have a much richer storyline to evaluate the technology and its value proposition.
The technological life cycle is exemplified by four stages:
The research and development (R&D) phase;
The ascent phase, when out-of-pocket costs have been recovered and the technology begins to gather strength;
The maturity phase, when the technology is stable;
The decline phase, after a point of reducing the utility of the technology.
Even though they cannot strictly apply to Bitcoin, for the singularity of the technology and the decentralized nature of the project, the current state of things could be pinpointed to the ascent phase: initial challenges have been solved, the technology is more mature and its value can be demonstrated with existing use cases. To this matter, an interesting consideration is that the R&D phase in Bitcoin is intrinsic in the nature of the network and is always ongoing. In fact, everyone can put forward a suggestion to improve the network in the form of a Bitcoin Improvement Proposal (BIP), which will then be evaluated by the community and if a consensus is reached, will be implemented on the network. Here you can find a comprehensive list of all BIP successfully implemented to get an idea of the rate of development on the Bitcoin network.
2. Legislative Clarity and Institutional Investors
Arguably, legislative clarity and institutional investors go hand in hand, since legislative clarity is fundamental for Bitcoin to be considered as an appetible alternative investment.
2.1 Legislation as Legitimization
In 2017, legislation around cryptocurrencies was almost non-existent, with few exceptions. Most countries were reluctant to consider them within their legislative frameworks and some proceeded to ban them. Currently, more than 130 countries have issued laws or policies on the subject. These rules cover a broad spectrum of implications of cryptocurrencies, ranging from categorization and definition of the terms, warning to potential investors, restriction on payments, and regulation of ICOs. The wide range of countries translates into a broad range of interpretations. For instance, this is how different countries have categorized cryptocurrencies differently for tax purposes:
Israel → taxed as an asset;
Bulgaria → taxed as a financial asset;
Switzerland → taxed as foreign currency;
Argentina & Spain → subject to income tax;
Denmark → subject to income tax and losses are deductible;
United Kingdom → corporations pay corporate tax, unincorporated businesses pay income tax, individuals pay capital gains tax.
Nonetheless, most of these regulations have to be considered as preliminary, since most countries are working to establish a comprehensive legislative framework for cryptocurrencies. Globally, it can be argued that the most favorable frameworks for the development and growth of the blockchain ecosystem can be found in countries such as Malta, Switzerland, and Singapore.
2.2 Institutional Investors and Bitcoin
In 2017, cryptocurrencies were seen as having a strong anti-establishment narrative, and so had a rather small investor pool and attractiveness. There was no real talk of Bitcoin being an asset or an investment in Wall Street. Many distinguished investors, the likes of Warren Buffet, Bill Gates, and Jamie Dimon went on to describe Bitcoin as “rat poison” and as such worthless.
Fast forward three years and the situation is drastically different: an interesting report by Greyscale Investment (2020) paints a completely different picture than in 2017, revealing that ever more investors are familiar with Bitcoin, with a YOY 11% increase, and even arguing that Bitcoin is slowly moving towards mainstream acceptance. In 2020, more than 62% of interviewed users declared themselves to be “familiar” with Bitcoin.
The increased retail attention towards Bitcoin is complemented by the growing number of investment vehicles addressed to institutional investors. Putting their money where their mouth is, Greyscale recently launched their Bitcoin Trust Fund, an investment vehicle allowing investors to trade shares of a fund holding a pool of Bitcoin. According to Bitcointreasuries.com, Greyscale holds 546,544 Bitcoin — around 70% of the 775,137 Bitcoin held by publicly traded companies. As shown in the image below, Grayscale is in good company: just recently, MicroStrategy, a business intelligence company purchased over $1 billion in Bitcoin (c.a. 70,000 BTC). Aside from companies directly investing in Bitcoin, others such as PayPal have allowed their user base (360 million) to invest in Bitcoin.
Not all investment vehicles are the same: options and futures are speculative bets on future prices and as such do not give investors any ownership rights of Bitcoin. Instead, Greyscale and MicroServices directly purchased Bitcoin and as such have full ownership over them — contributing to the overall dynamics of supply and demand in the Bitcoin network. Below you can find a comprehensive list of all companies directly or indirectly invested in Bitcoin, divided into publicly traded, privately traded, and ETF like.
The issuance of different investment vehicles, catered for the different risk/exposure of each category of investors contribute to a virtuous cycle of interest, increasing the accessibility of Bitcoin to traditional investors — the example of which is the record number of open interest towards Bitcoin options, now at an ATH of more than $7 billion — a 400% increase since September 2020.
The increasing variety of investment vehicles, coupled with clearer legislation is leading to a paradigm change in the way investors perceive Bitcoin. This opened the possibility to develop a whole derivative and credit market, as well as creating services to mitigate the complexity and security risks spurring from holding a large amount of Bitcoin. To this matter, several companies — such as Fidelity, as early as in 2018 — have developed services to 1. offer custody of cryptocurrency assets to institutional investors in order to safeguard their large holdings and 2. allow investors to use Bitcoin as collateral for their transactions.
Nowadays it is much easier both from a regulatory and practical point of view for institutional investors to hold and invest in Bitcoin. It is very likely that this trend will continue during the upcoming years and that Bitcoin will soon be regarded as a “mainstream” alternative asset.
3. On-chain Metrics
The next section relies purely on on-chain metrics, such as demand and supply, the amount of Bitcoin holders, and the general dominance of Bitcoin vs Alt-coins. With the emission of Bitcoin being constant (6.75 BTC every 10 minutes on average) the increased attention of retail and institutional investors is likely to lead to a substantial increase in demand — and price.
3.1 The Bitcoin schism: Bitcoin Dominance vs Alt-coins
Bitcoin experienced more than a 160% price increase in 2020, shadowing most other cryptocurrencies. In the previous bull run of 2017, the price increase was fueled by the speculative phenomenon of ICOs, where new coins were minted out of thin air and mostly without any value proposition. Especially during the months of December 2017 and January 2018, the whole cryptocurrency market experienced an irrational increase in market capitalization. The smaller cryptocurrencies were doing x2, x3 during the course of a week. This trend is reflected in the Bitcoin dominance-ratio, measuring the total market capitalization of Bitcoin vs that of Alt-coins. At the peak of the hype in 2017, Bitcoin dominance averaged around 82% for the year, only to go as low as 40% during December. The trend has been consistent ever since: while Bitcoin reached a new ATH most other cryptocurrencies did not recover from the following bear market and are nowadays at much lower valuations compared to their historical ATH. This separation is exemplified by the increasing Bitcoin dominance vs alt-coins, now at 70%.
One could argue that nowadays Bitcoin has schismed from all other currencies, given its peculiar properties. Cryptocurrency users have reached a silent consensus: Bitcoin is a cryptocurrency, but other cryptocurrencies are nothing like Bitcoin.
3.2 A Growing Network
Such reputable standing is confirmed by the fact that the Bitcoin network is stronger than ever:
1) The hash rate of the Bitcoin network is at an ATH. It represents the aggregate computational power provided by miners to sustain the network. Being a decentralized peer-to-peer network Bitcoin relies on the electricity provided by miners to operate. A high hash rate is a sign that the Bitcoin network is healthy. The higher the hash rate, the harder for a malicious actor to attack the network with a 51-percent attack.
2) The number of Bitcoin addresses is also at an ATH: nowadays there are more than 33 million wallets holding Bitcoin balance, a YOY increase of 16% from the 28 million in January 2020.
Of these addresses, 96.92% are in profit, while only 1.39% are at a loss, and 1.69% in break-even (data at the 1st of January 2021).
3.3 HODLERS vs Traders
Another interesting indicator regards Unspent Transaction Outputs (UTXO). To summarize, they can be compared to the cumulative available balance on the Bitcoin network: the amount remaining after executing a transaction.
The average holding time for a Bitcoin is 3.1 years. Furthermore, more than 21.9% of all Bitcoin (4m BTC) has not been moved for more than 5 years, 11.92% (2.2m BTC) since 3–5 years, and 13% (2.5m BTC) since 2–3 years. Only about 5% (1.1m BTC) of total Bitcoin has been moved during the last week and 7% (1.34 m BTC) between last week and last month. In 2017 short-term trading — highlighted by the red-yellow area — was prevalent, while nowadays a majority of users are holding Bitcoin — exemplified by the green-blue area.
As such, 64% of total Bitcoin addresses (>21 million) are considered holders — a strong increase, considering that they were 17.4 million in December 2019 — as they haven’t spent their Bitcoin for 1Y+, 24.5% (8million) are considered cruisers (1–12 m), while only 11% (3.7 million addresses) of Bitcoin users are considered traders (<1M). The overall trend shows an increasing tendency to hold Bitcoin and not trade it in a short period.
4. Bitcoin: a Scarce and Deflationary Commodity
As time goes on, Bitcoin is an increasingly scarce commodity. Too often underrated, the finite nature of Bitcoin is, without doubt, one of its most appealing and interesting features. Every four years, the emission of Bitcoin is halved until all 21 million Bitcoin will be mined. This is estimated to happen in 2140. The last halving occurred in May 2020, reducing the reward given to miners for processing Bitcoin transactions from 12 to 6.75 Bitcoin per block. As a consequence, this also increases the cost of production of a single Bitcoin in terms of electricity. To compensate, the reduced supply is nowadays met by an increase in demand, coming both from retail investors and from institutional players who purchased high amounts of Bitcoin — as mentioned in the section above.
Due to its characteristics, such as divisibility, portability, and scarcity, Bitcoin has been frequently compared to gold as a store of value. The Winklevoss Brothers (co-founders of Facebook) even argue that Bitcoin is better than gold as, in fact, it is “the only scarce commodity in the universe” for in the future advanced technologies will allow us to obtain gold via asteroid mining. Due to its deflationary nature Bitcoin certainly represents a safe haven also for those coming from countries whose currencies have been severely inflated due to poor economic conditions, or economic sanctions, such as Venezuela, Turkey, and Iran. It can be used to send home remittances, for international trade or simply to pay for essential goods. If traditional fiat currencies continue to experience high levels of inflation and fluctuations in the near future, then more people would look at Bitcoin as a safe asset, to shield their wealth from economic instability and inflation.
5. Last but not least
Bitcoin is now 12 years old and it is the most secure financial network in the world : it secures more than $500 billion, has an uptime of more than 99%, and never suffered a hacking attack. It is being increasingly legitimized by regulators and attracts the attention of both retail and institutional investors as an alternative asset. The price of 1 Bitcoin is nowadays hovering around 29,000$ — 40% higher than the previous high in 2017 — confirming the strong uptrend.
The technological stack behind Bitcoin is very atypical: open-source, decentralized, and encrypted, fundamental for the decentralized and privacy-protecting nature of the network. A point that cannot be stressed enough is that both the technology, the legislation, and the application of Bitcoin as a technology and a currency have been ongoing and cannot be considered as fixed — doing so would be to severely underestimate its flexibility. Bitcoin is liquid money for the 21st century: programmable and in constant improvement.
The adoption cycle of highly disruptive technology is inevitably long: when it was first developed in 2009, its concepts were almost utopic and hardly rejected by banks that referred to Bitcoin as “technological populism”. These were fair concerns and the status quo cannot be blamed for such reasoning. However, the general landscape has profoundly changed since. The four main developments pointed out in the different sections have resulted in a completely different environment, which is nowadays much more prone to embrace Bitcoin, both from an ideological and practical point of view.
There can be no prediction with regard to future adoption or the future price of Bitcoin. Instead, what can be predicted is that the world will gradually get used to Bitcoin: eventually, countries will slowly go through the denial-and-adoption cycle and recognize the value of Bitcoin, developing appropriate legislative frameworks; the network will continue to improve in terms of pace, security, and practicality, with more use cases; more investments vehicles will be created, to cover the full spectrum of investors.
All of these reasons contribute to why Bitcoin in 2021 is much different than it was in 2017.
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