TLDR;
- The Bitcoin market has been shaping up strikingly similar to how the market unfolded from 2013 to 2016.
- After Bitcoin breaking all-time highs, sentiment data shows that anticipations for a strong Bitcoin price performance are high.
- If the Bitcoin price increases by several orders of magnitude, the entire industry will change.
- Anticipated changes include a more liquid and efficient marketplace, regulation intensifying, over $10 billion in annual investment into Bitcoin mining, increased influence for current holders, and Bitcoin becoming a more polarizing topic.
For three years, Bitcoin failed to return to the frothy highs formed in November 2013. The audacious project had its chance to shine but had obviously failed after an 87% peak-to-trough price drop over the following year.
But Bitcoin price eventually began to recover. It wouldn’t be until February 2017 that the price would surpass the highs previously formed in November 2013. This would turn out to be the early phases of a bull market that would completely change the scale and texture of the industry being built around Bitcoin.
How 2017 Changed Bitcoin
Before 2017, awareness of Bitcoin was limited. Bitcoin was kept far away from mass media. The few mentions Bitcoin did receive in mass media typically misreported how the technology worked and predicted its ultimate failure.
Everything changed as the market cap of Bitcoin rapidly grew over 2017. Bitcoin became a more regular topic in the mass media. Bloomberg, CNBC, and Forbes began regularly reporting on the technological and market developments of Bitcoin.
The 2017 market movements inspired a new wave of entrepreneurs to enter the industry. Many entered late in the market cycle as prices and attention peaked. Most would be pushed out in the following bear market, but some would also stay and change the online ecosystem for cryptocurrencies.
Before 2017, content about Bitcoin was scarce and difficult to understand. In 2020, there is no shortage of high-quality content explaining cryptocurrencies and reporting on updates. All businesses providing products and services related to Bitcoin are competing to release exemplary content that increases their chances of ranking high for search terms in Google.
Moreover, there are more sophisticated tools and services. Those in the industry can access credit with their cryptocurrency assets, utilize a wide variety of analytical tools to assess market movements, and trade in a more liquid marketplace.
There is currently a myriad of spot and futures exchanges making up the liquid marketplace, with many launching in the latter end of 2017. Before 2017, Bitcoin market liquidity was poor, with cross-border and cross-venue spreads often in the single digits.
In summary, the price increases of 2017 did not simply serve to boost BTC holders’ wealth. It forever changed the industry. Few consider how a similar market cycle would impact the industry.
Is Bitcoin Setting Up For Another 2017?
The current Bitcoin price chart is shaping up eerily similar to how the 2013 to 2016 market cycle unfolded. Bitcoin has recently breached its previous all-time highs after roughly three years, which included an 84% peak-to-low depreciation.
Anticipations for further Bitcoin price increases are high. The Crypto Greed and Fear Index – a sentiment indicator that analyzes various sources – highlights that market participants currently have extremely bullish outlooks.
If Bitcoin does perform similarly to 2017 over the next year, the industry will never be the same again. We would anticipate the following changes to the industry after a price performance similar to 2017:
- Presence of institutional investors changing the market structure
- Regulatory stance intensifying
- Over $10 billion in annual investment into Bitcoin mining
- Current prominent holders will reach a new echelon of power.
- Bitcoin as a topic will become more divisive.
Institutional Investors Will Change the Market Structure
We have already observed several corporate entities and funds gain exposure to the Bitcoin market. MicroStrategy, Square, and Stone Ridge Asset Management are a few notable examples.
Hedge funds, quant funds, and asset managers will be among the institutions increasing their exposure in the market. Research suggests that these players are already playing a larger role in the Bitcoin market compared to 2017. Analysis by CoinMetrics shows that the Bitcoin price rises since November have been more pronounced during times when the US market was open. US market hours are a time when institutional buyers are active. Since November, the average hourly increase during US market hours has been 0.1%, while the average hourly increase outside of these hours has been 0.04%. During the same months in 2017, the average hourly change during US hours was -0.13%, while the average hourly increase outside of these hours was 0.11%.
Such institutional players will make it more difficult for small-scale speculators and retail to gain an edge in the market. The market will become even more liquid and efficient. Trading volume attributable to algorithmic trading will be expected to increase. As this happens, the odds of retail investors outperforming the market will diminish. The vast majority of retail traders who do trade will likely eat into the returns that they would experience by buying and holding. Institutions will capture their forgone returns.
Cryptocurrency Regulation Intensifying
A more stringent regulatory environment is a natural companion to the increased presence of institutional investors. As Bitcoin price and the wealth of holders simultaneously increase, government concerns regarding tax evasion or a weakening fiat currency system will exacerbate.
Coinbase CEO Brian Armstrong recently voiced concerns that US Treasury Secretary Steve Mnuchin may introduce a regulation regarding self-custody Bitcoin wallets. The law would require any counterparty transacting with such a wallet to carry out KYC on the owner.
Such a regulation would echo the concerns of developer Matt Corallo that the government is enforcing a split in Bitcoin into “KYC Bitcoin” and “illegal Bitcoin”. Recent developments have also suggested that the crackdown against no-KYC entities will intensify. The US DoJ and CFTC filed lawsuits against BitMEX this year for violating regulations mainly concerned with KYC. Such developments are not limited to the US. China has been cracking down on OTC desks this year.
Capital Inflows into Bitcoin Mining
Bitcoin price appreciation ramps up activity in the Bitcoin mining industry. As more demand chases after a limited rig supply, hardware prices will increase.
On aggregate, the Bitcoin mining industry can be assumed to operate just above the margin. This assumption allows us to estimate how much has been invested in the industry by considering Bitcoin miner revenue.
Since the start of 2019, Bitcoin miners have earned $9.1 billion from coinbase rewards. This can be used as a proxy for how much has been invested over the same timeframe. $9.1 billion has been invested despite Bitcoin weathering a ~40% daily price drop in March and the May halving.
What would it take for investment in Bitcoin mining to reach over $10 billion annually? Bitcoin price would need to reach $30,441 for the estimated investment in Bitcoin mining to reach $10 billion annually. If we observe conditions similar to 2017, such a figure will be far surpassed.
Influence of Current BTC Holders will Increase
If Bitcoin price appreciates by several orders of magnitude, current BTC holders’ influence will significantly increase. At the time of writing, the number of Bitcoin addresses with over 1,000 BTC is close to record highs at 2,259. The number of addresses with greater than 100 BTC is 108.
Price increasing by orders of magnitude may perpetually change the position of such holders in society. Their wealth and influence would reach a new echelon. Owners of large corporations and funds in the cryptocurrency industry may increasingly influence how the regulatory environment is shaped.
Mike Novogratz, Barry Silbert, Brian Armstrong, Tim Draper, and the Winklevoss twins are just a handful of individuals who are publicly known to have large allocations. If their wealth was to increase by another 5x to 10x, their position in the marketplace would be far superior.
In such a circumstance, we may observe corporations primarily focused on cryptocurrency acquiring corporations or startups that are specialists in other technology fields. Such acquisitions may complement their existing services or could serve to decrease their exposure to a cryptocurrency market that may get overheated. Artificial intelligence startups would be a natural candidate for acquisitions as their adaptive algorithms could be well suited to improving user experience and retention on cryptocurrency products.
Cryptocurrency Divisiveness to Intensify
As the wealth of cryptocurrency holders increase, the divisiveness of the topic will likely increase. A popular narrative behind the last bull market was the triumph of the everyday retail investor over Wall Street.
Future bull markets will be different. Institutions have exposure, and new entrants in the market are increasingly tied to some business interests. Many entered the industry to launch products and services and will be different from the pre-2017 entrants who may have simply been advocates of the technology.
Significant price increases will undoubtedly stir up some hostility between those that have exposure and those that don’t. The topic of Bitcoin will become more polarizing. Physical attacks to gain access to wallets will naturally rise as the increased wealth of owners make them a more attractive target.
What is the Future of Bitcoin?
Bitcoin price performance has been extremely strong since the start of November. At the time of writing, Bitcoin is trading 37% higher than the November open. Several analysts have been putting in their price predictions with explosive movements to the upside anticipated by many.
However, upside price movements have far-reaching effects. They reverberate across the entire industry and change it in often unpredictable ways. In this analysis, we have considered some of the more likely ways that rising prices will impact the Bitcoin industry.
At their essence, these are simply speculations and may turn out differently. Nonetheless, significant changes to the industry are certainly expected if Bitcoin price records a comparable performance to 2017. As with any developments, many of these changes will only become clear in retrospect.
