@$19599: Why Has Bitcoin Surged and Crashed over the Last Two Years?

The past couple of years in crypto have been exceptionally turbulent, taking in new highs and new narratives to accompany them, along with crashes, collapses and prolonged grinds through market lows.

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The fact that this wild ride has occurred when macro events seem to have tipped into a period of conflict and upheaval is no coincidence; current affairs and markets are intertwined, but the global background context adds to the sense of witnessing an especially volatile period.

All of which can lead one to look at Bitcoin and question what exactly happened to send prices surging to a 2021 double top, peaking at about $69,000 (having touched flash crash lows below $4,000 back in March 2020), only to then freefall back down to below $18,000 by early summer 2022, from which point signs of recovery have been repeatedly quashed.

What Drove the Bullishness of 2021?

One novel factor this time around was that due to the unprecedented measures implemented by governments around the world in response to covid-19, large swathes of the population found themselves spending substantial periods of 2021 indoors, and often in front of a computer.

At the same time, governments were printing money, and stimulus payments were finding their way to potential retail investors who had both the time and the inclination to explore risk-on trading and investment opportunities.

Coupled with this, there was, for some people, a sense of unease that perhaps the institutions in charge of the economy weren’t as reliable, responsible or forward-thinking as they had once believed, and that it might have been worth paying attention to alternative voices, such as those who had for some time been talking about Bitcoin.

Around this point, we see the amplification of several narratives: that Bitcoin was a hedge against inflation (while money was being printed like never before), that Bitcoin enabled financial independence and general self-reliance (while governments were micromanaging citizens’ personal and business affairs in an abruptly authoritarian manner), and that cryptocurrencies might have been the decentralized monetary progression required to enter a fully digital era (while Zoom and Amazon suddenly became ever-present, web-based conduits for our work and commercial needs).

We also had what appeared to be the beginnings of institutional Bitcoin adoption. A first Bitcoin futures ETF was approved in the US, MicroStrategy committed to using Bitcoin as its primary treasury reserve asset, while the Founder and then-CEO, Michael Saylor publicly advocated the case for Bitcoin, and a nation-state, El Salvador, enthusiastically adopted Bitcoin as legal tender.

It’s also worth noting the influence of the book The Bitcoin Standard, by Saifedean Ammous, which laid out the case for Bitcoin in a comprehensive manner that adeptly balanced academic and accessible tones.

Crashing the Party

Post-peak, events have unravelled almost as quickly as they tied together in the first place. Cheap cash and stimulus checks cannot be extended for long without doing substantial economic damage, and, inevitably, the hangover after the printing party is out-of-hand levels of inflation.

Cue rising interest rates, equities Equities Equities can be characterized as stocks or shares in a company that investors can buy or sell. When you buy a stock, you are in essence buying an equity, becoming a partial owner of shares in a specific company or fund.However, equities do not pay a fixed interest rate, and as such are not considered guaranteed income. As such, equity markets are often associated with risk.When a company issues bonds, it’s taking loans from buyers. When a company offers shares, on the other hand, it’s selling partial ownership in the company.There are many reasons for individuals investing in equities. In the United States for example, equity markets are amongst the largest in terms of transactions, investors, and turnover.Why Invest in Equities?Overall, the appeal of equities the potential for high returns. Most portfolios feature some portion of equity exposure for growth.In terms of investing, younger individuals can afford to take on higher levels of equity exposure, i.e. risk. Consequently, these people have more stocks in their portfolio because of their potential for returns over time. However, as you are planning to retire, equity exposure becomes more of a risk.This why many investors or holders of retirement accounts transition at least part of their investments from stocks to bonds or fixed-income as they get older.Equity holders can also benefit through dividends, which differ notably from capital gains or price differences in stocks you have purchased.Dividends reflect periodic payments made from a company to its shareholders. They’re taxed like long-term capital gains, which vary by country. Equities can be characterized as stocks or shares in a company that investors can buy or sell. When you buy a stock, you are in essence buying an equity, becoming a partial owner of shares in a specific company or fund.However, equities do not pay a fixed interest rate, and as such are not considered guaranteed income. As such, equity markets are often associated with risk.When a company issues bonds, it’s taking loans from buyers. When a company offers shares, on the other hand, it’s selling partial ownership in the company.There are many reasons for individuals investing in equities. In the United States for example, equity markets are amongst the largest in terms of transactions, investors, and turnover.Why Invest in Equities?Overall, the appeal of equities the potential for high returns. Most portfolios feature some portion of equity exposure for growth.In terms of investing, younger individuals can afford to take on higher levels of equity exposure, i.e. risk. Consequently, these people have more stocks in their portfolio because of their potential for returns over time. However, as you are planning to retire, equity exposure becomes more of a risk.This why many investors or holders of retirement accounts transition at least part of their investments from stocks to bonds or fixed-income as they get older.Equity holders can also benefit through dividends, which differ notably from capital gains or price differences in stocks you have purchased.Dividends reflect periodic payments made from a company to its shareholders. They’re taxed like long-term capital gains, which vary by country. Read this Term taking a hit, and the narrative by which Bitcoin is an inflation hedge falling at the first hurdle. In fact, Bitcoin is, at the present moment, behaving similarly to a high beta stock, and so when equities fall, Bitcoin dumps harder.

With a switch from bullish to bearish trends, and the catastrophic collapse of Terra Luna, the precariousness of several recklessly over-leveraged crypto organizations was revealed, and we witnessed market contagion taking out several major players, including Celsius and Three Arrows Capital.

Throughout the commotion, MicroStrategy has stood firm, and the indications are that Michael Saylor’s conviction in Bitcoin is deeply held. However, if expectations for this cycle were that other corporations would follow in MicroStrategy’s trail, then they have not materialized.

Prior to economic conditions hitting the inevitable, post-stimulus brick wall, 2021 saw some other events working against Bitcoin. Elon Musk was pro-Bitcoin at the start of the year when Tesla bought $1.5 billion worth of the digital asset and announced that it would accept Bitcoin payments, but then in May, Tesla executed a U-turn on those Bitcoin payments, citing environmental concerns. In the same month, China restricted Bitcoin mining in September and banned all crypto trading.

In 2022, even as covid-related turmoil retreated in the rearview mirror, we saw the outbreak of war in Ukraine, and ominous energy crises sliding into view. With Bitcoin’s price now hitched to equities, these news events and their negative impact on prices have further undermined claims that Bitcoin was ready to decouple and operate as a safe-haven store of value.

The Halving Cycle Plays Out

Further ecosystem quakes and macro shocks are possible, along with continued drops in price, and the economic headwinds are still blowing. However, it should be emphasized that Bitcoin is weathering the storm.

One of the key advantages that Bitcoin has over competitor blockchains is that it is battle-hardened, and every event of this current cycle has only caused it to become better stress-tested, more impervious and more antifragile.

The narratives around Bitcoin are still in play, that it is not a tech stock, that it is sound money, and that it is uniquely capable of functioning as a digital inflation hedge, store of value and working currency, but these are long-term functions that are still to unfold.

There is one additional peculiarity to this story, which is the persistent correlation between crypto fluctuations and Bitcoin’s four-year halving Halving Halving represents a phenomenon when crypto mining rewards are cut in half. Cryptocurrency networks that run on Proof-of-Work (PoW) algorithms require the computers (nodes) that uphold them to solve complex equations that are used to confirm transactions. This process is known as mining. In exchange for their work, these nodes are given rewards in the form of the crypto token that belongs to that particular network. For example, on the Bitcoin network, halving happens regularly at preset intervals of every 210,000 blocks. This is built into the Bitcoin protocol. Bitcoin halving in particular is a process of dividing the number of generated rewards per block in order to maintain the total supply of Bitcoin, which cannot exceed 21 million BTC. Block rewards are the main engine of Bitcoin mining and, therefore, the main power behind the operation of the network.This process is not very well understood and has given way too many hypotheses. In theory, the increased scarcity drives the price of a given cryptocurrency up. Consequently, if miners have less incentive to keep doing their work, less coins will be mined, and the coins that are mined will be more valuable. May 2020 Bitcoin HalvingOn May 12, 2020, a Bitcoin halving took place. Bitcoin mining reward was cut in half, falling from 12.5 BTC for every block of transaction data that was added to the network to 6.25 BTC; the number of BTC produced each day fell from 1800 to 900.Despite the massive news cycle that surrounded the halving event, the price of Bitcoin managed to stay relatively stable, providing a valuable case study for future halving scenarios.Bitcoin had already halved twice previously, with each instance resulting in an increase in the price of the crypto. Halving represents a phenomenon when crypto mining rewards are cut in half. Cryptocurrency networks that run on Proof-of-Work (PoW) algorithms require the computers (nodes) that uphold them to solve complex equations that are used to confirm transactions. This process is known as mining. In exchange for their work, these nodes are given rewards in the form of the crypto token that belongs to that particular network. For example, on the Bitcoin network, halving happens regularly at preset intervals of every 210,000 blocks. This is built into the Bitcoin protocol. Bitcoin halving in particular is a process of dividing the number of generated rewards per block in order to maintain the total supply of Bitcoin, which cannot exceed 21 million BTC. Block rewards are the main engine of Bitcoin mining and, therefore, the main power behind the operation of the network.This process is not very well understood and has given way too many hypotheses. In theory, the increased scarcity drives the price of a given cryptocurrency up. Consequently, if miners have less incentive to keep doing their work, less coins will be mined, and the coins that are mined will be more valuable. May 2020 Bitcoin HalvingOn May 12, 2020, a Bitcoin halving took place. Bitcoin mining reward was cut in half, falling from 12.5 BTC for every block of transaction data that was added to the network to 6.25 BTC; the number of BTC produced each day fell from 1800 to 900.Despite the massive news cycle that surrounded the halving event, the price of Bitcoin managed to stay relatively stable, providing a valuable case study for future halving scenarios.Bitcoin had already halved twice previously, with each instance resulting in an increase in the price of the crypto. Read this Term cycles. According to these observable, cyclical trends, Bitcoin, despite all the chaos, has performed exactly as should have been expected.

In fact, if you only followed cycle trends and had known absolutely nothing of the news (crypto, financial, or in general) in 2021 and 2022, you could still have accurately predicted that Bitcoin would peak in late 2021 and then crash hard in 2022.

It can, at first sight, seem strange that the influence of external current affairs appears to synchronize with forecasted price patterns stemming from Bitcoin’s internal protocols, but nonetheless, for now, at least, the established cycles still hold.