Bitcoin’s volatility is legendary, where fortunes are made & lost
Ever since the Bitcoin Genesis Block was mined in January of 2009, Bitcoin has had wild swings in price. Initially, it was extremely volatile since it was a new, low liquidity, fledgling market, based upon experimental technology, which had very little market depth, and low adoption. More recently, it has been volatile due to the hype and exuberance surrounding the 4 year Bitcoin halving cycle.
The halving is when Bitcoin algorithmically reduces the amount of newly minted Bitcoins produced by Proof of Work (PoW) miners, by half. The halving takes place every 210,000 blocks, or every 4 years on average.
In the past year, we have witnessed the epic collapses of many of the most popular exchanges, stablecoins, and lending platforms in the crypto space. These unfortunate occurrences have led many newcomers to crypto to predict that it’s dead, it’s over, it’s time to pack it all up and go home. Granted, this bear market has been especially intense for many users and investors who weren’t around for previous crypto bear markets, but for those who were, it’s been par for the course.
Previously, the crypto market was a niche market which was viewed as risky due to the lack of regulatory oversight. Bitcoin and crypto were viewed as illegitimate, and businesses, financial institutions, and investors tended to avoid participation in the crypto markets for these reasons. There were lots of scams, rugpulls, and other pitfalls for early investors.
This all started to change around 2015, when the ICO boom began to take off, crypto focused hedge funds began to emerge, mainstream financial media began to regularly cover the markets, and regulators began to contemplate how they would impose a set of fair rules on the crypto markets.
Crypto markets at the time were unconventional, decentralised, and a very different beast than traditional markets. Everyone started to realise that crypto might be more than a passing fad, that there might be something more to this novel technology, and that it might be here to stay for the long haul.
The Bitcoin Halving’s impact on crypto asset prices
Bitcoin leads the crypto market, as the original cryptocurrency. It’s the largest coin by market cap, the most adopted, the most liquid coin, and it’s also the primary quote currency in crypto trading pairs on most major cryptocurrency trading exchanges.
This means that wherever Bitcoin price action goes, the majority of the other 22,357 altcoins to date usually follow. There are some outliers that tend to countertrade to Bitcoin’s market momentum, but generally as a rule, Bitcoin is the leader and influences the price of most other coins.
Bitcoin’s price action so far, in the 14 years since its launch, has been dominated by the halving cycle. Typically, leading into a halving and shortly after, Bitcoin has an explosion in price, which leads more and more investors to pile into the market.
This continues until it reaches a point that the price action becomes an irrational and unsustainable bubble. This is when Bitcoin price tends to have a huge collapse as the smart money takes profits and leaves the market, and the latecomers and less astute investors who purchased near the top are left holding the bag.
This market cycle which takes place after every halving, has led to the washout and collapse of countless altcoins, exchanges, and crypto startups with business models which did not take this volatility into account. Bitcoin has routinely collapsed in price with drawdowns up to 90% or more, on multiple occasions since 2009.
Those who manage to hold on to their coins until the next halving after buying the top, are usually celebrated by the Bitcoin community as being blessed with ‘diamond hands’ forged in a trial by fire, and rewarded handsomely for hodling to new all time highs. It sounds so simple and is anything but easy. Just ask any long time Bitcoiner about their hodling stories.
The first Bitcoin bear market in 2011, saw a bullish run up to $32 per BTC and then the price collapsed to $0.01, in the fallout from the infamous Mt. Gox hack. This led to the historic first published proclamation that Bitcoin was dead. It’s kind of become a meme in the crypto world, that during the bear market portion of the 4 year halving cycle in crypto, the media makes multiple proclamations of Bitcoin’s death.
Several sites have tracked these announcements which have come to be known as “Bitcoin obituaries”, by listing every time the media has run a story about the death of Bitcoin. Currently we are up to 469 different proclamations of Bitcoin’s death. Despite the repeated assertions from financial “experts” in the media, somehow it still won’t die, despite their desire that it would.
Dead Coins, insolvent exchanges, failed startups and other tragedies
With the 2022 Terra collapse, the insolvencies of Three Arrows Capital, Voyager, Celsius, and FTX, and the more recent Digital Currency Group (DCG) and Genesis/Gemini controversy, it may seem like an earth shattering spate of bad news for crypto. But if we examine history, we’ll see it’s not the first time something like this has happened.
If we take a look at the historical snapshots on Coinmarketcap, the rankings of crypto assets may seem completely alien to those who are currently investing in the crypto markets. We see an array of coins which may be unfamiliar to newcomers. Projects with strange names like Mincoin, Novacoin, Freicoin, and Peercoin. These projects were the initial Bitcoin forks, which were the first altcoins.
Many of these projects are not around anymore, they’ve been abandoned and are known as “ dead coins”. Aside from abandoned coins, there are also scam coins, failed ICO coins, as well as failed meme or joke coins. All in all, there are over 2000 entries on popular listings of dead crypto asset lists. Many of the more than 20,000 current altcoins may soon join the ranks of the dead coins from prior market cycles.
Crypto exchanges have also historically been a notoriously tough business to run successfully. Over the years, we have seen many, many, exchanges fail for a variety of reasons. Reasons for failure have commonly been things like mismanagement of funds, regulatory problems, exchange hacks, scams, and just plain inability to compete profitably in a notoriously tough business. Cryptowisser.com has a great page tracking exchange failures for those who are interested in the complete rundown.
It’s been said that as much as 42 percent of exchanges fail. Exchange failures increased by 252 percent in 2019, and increased again by 17 percent in 2020. Beginning in November of 2021, we saw the beginning of a string of collapsed projects, lending platforms, and exchanges that created the fallout and current market turmoil of our crypto winter at present. While the markets have seemed to be rebounding a bit over the past few weeks, we may not be out of the woods yet.
In addition to dead coins and failed exchanges, prior market cycles in crypto have also witnessed the failures of countless crypto startups. News site Bitcoinist reported that as much as 92 percent of crypto startups fail, and these failed blockchain startups tend to have a very brief average life expectancy of just 1.22 years.
While startups in general are well known to be tough to launch successfully, it seems that many crypto specific startups are even more difficult to get off the ground. Startups like R3, Earn.com, Graphite Docs, and too many others to list have failed for multiple reasons.
The primary causes for failures in crypto startups are things like creating a solution which is seeking a problem to solve, a poor business model which doesn’t account for market instability, building vaporware which relies on hype and buzzwords, banking on the current fly by night token trends in a market cycle, and trying to utilise a blockchain for something that could be done more simply or efficiently without one.
“Reports of My Death Have Been Greatly Exaggerated” – Mark Twain
Even with the astonishingly high rates of failure in the crypto markets, with an extensive list of examples of dead coins, failed projects, and formerly billion dollar startups going bankrupt, it is apparent to anyone that’s been paying attention that the overall crypto asset industry is here to stay.
We are witnessing the turbulent emergence of a new asset class, and a completely new digital form of programmable money for the first time in human history. The road is going to be bumpy, just as it was with other previous S adoption curves for new technologies.
Despite the negativity surrounding the crypto industry during this current bear market cycle, crypto has remained resilient, and usually bounces back with even more strength and vigour throughout its short but storied 14 year history, and we expect it to do so this time, as well.
This is not the first time we’ve seen a lot of projects, startups, lenders, and exchanges fail, and it certainly won’t be the last. In comparison, we still see major players in traditional industries make grave mistakes which lead them into bankruptcy, and the crypto industry is no different. With its increased volatility and market momentum, we simply see it as amplified, leading to the often repeated and sensational claims that it’s dead, once again.
Nothing could be further from the truth.
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