In the last few weeks, the main cryptocurrency news source I read, TrustNodes, had no less than eight articles about daily price movements in BTC and ETH. If you go onto forum boards or messaging channels, most of the discussion is on the price, and how they’ve moved since yesterday (maybe last week if we’re doing an investigative piece).
If this was your main source of ‘news’ in the cryptocurrency world, you would very likely have a skewed vision of what matters and what does not. Many traders and readers get tunneled visioned on very trivial data with no context to overall market movements and fundamentals. It makes the world very hard to understand and very easy to get blindsided by large scale events.
But when you slow down, step away from the troll box and look where your news sources are not looking, you start to get some insight. There is a chaos in the minutia that begins to dissipate when you zoom out and look at the big picture.
Today, I want to talk about one of those big picture phenomenons that are affecting the price of every cryptocurrency you know. Here are three major surges and price crashes and the lessons we can take away from them.
Dot Com Bubble
Source: Wall Street Journal
The Dot Com Bubble started with the widespread adoption of the internet (I’m sure you’ve heard of it). Because most Dot Com companies launched on the NASDAQ, the price of NASDAQ as a whole became a good picture of what was happening in the internet website market.
As this very well illustrated graph from the WSJ show, the money invest, and therefore the price of these Dot Com companies grew quickly through 1998, then faster by 1999, then shot up over 2000 points in a little over three months to an ATH of 500 points. Then the price made its first crash, stabilizing briefly at 4,000 points, then eventually crashing and hitting a floor of just over 1,000 points.
That’s the part you may likely be aware of, but there’s more to the story. From the very peak of the market at 5000 to the bear market low of a little over 1,000, the time elapsed during the ‘crash’ took 31 months to complete. Moreover, the market did not return to it’s ATH of 5000 until August 2016, or 16 years after the Dot Com Bubble began it’s downfall.
US Housing Price Crash
In 2008, the world went through one of the worst financial crisis’ of our time. The details about how such an event was able to occur is a fascinating story that we won’t dive into in this paper. What is relevant is that we can track how the price of homes, the primary ‘asset affecting the financial crisis, moved before, during and after the market crash.
From the early 90’s through about 2000, the average house price in the US grew slowly, increasing at a steady rate. However, this rate of growth continued, moving the average home price up faster and faster. This was largely fueled by shady financial vehicles and lowered standards for home buyers, but again, details not needing to go into here.
The market hit a crest in 2008, where the price peaked and then began its quick descent to a new price floor, dropping by roughly 25% by the year 2012. According to this particular index (there are other similar indexes that track numbers in a slightly different manner), the market did not reach its pre crash high until the year 2016, or almost 8 years after the initial crash. The time from peak to valley was roughly four years.
In May of 2013, the market capitalization of Bitcoin was stable at about $1 billion. There were some minor peaks and valleys, but the price of the asset stayed relatively until the end of the year. During this time, Bitcoin took center stage after a series of high profile events, cap stoned by the congressional ‘lovefest’, where sitting congress people praised Bitcoin’s ingenuity.
During this time, Bitcoin hit an ATH over $1,100, bringing the market capitalization to almost $12 billion dollars. Over the next few years, the price of Bitcoin collapsed and hit a low of about $200 before re climbing during the last year to an All Time High of almost $3,000.
While this has been great for cryptocurrency, the time frame of when these events happened and how long it took to both crash and recover are often lost. Bitcoin first hit an all time high in early December of 2013. The cryptocurrency hit a post market low of less than $200 in January of 2015, over one year later. He’s the amazing part: Bitcoin did not raise above $500 until May of 2016 and did not surprise it’s previous ATH until January of 2017, a full three years after it’s old peak.
What Does This Mean For the Cryptocurrency Market Today?
No two bubbles act quite alike. The Housing Bubble and Bitcoin recovered within a decade of one another, while the Nasdaq took almost two decades to reach it’s old ATH. Some crashed faster than other and recovered quicker, and each had their own size.
However one thing that does become apparent through all of these crashes is this: when a crash takes place, it does not take weeks or months to recover, but takes years to return to their previous highs. There are almost no examples of markets rising as fast as these markets and then sustaining or even growing beyond that. Markets and people do not act like that.
Here is the cryptocurrency market today:
And here is the cryptocurrency market without Bitcoin:
Even if this market reacts like Bitcoin and recovers just as quickly, we may not expect to see $+60 billion altcoin market valuation again until the year 2020 and may not even hit a price floor until 2018. If it responds like the Nasdaq, then we’re talking about the late-2020’s until the price recovers.
If this were the case, how would you choose to respond? Would you be worried about the price of Ethereum or Ripple or any other cryptocurrency on a day to day basis? Or would you rather pour your time and energy into something of more substance?
This is far from the last cryptocurrency crash our market has seen, and if the last two are any indication of where we’re going next (2013 -> $12 Billion, 2017 -> +$120 Billion), we’re likely going to see bigger highs and vaster lows.