The Anatomy of Bitcoin’s Adoption Cycles
Cody Garrison | 1/4/2021
Bitcoin has undergone a series of radical price transformations in its brief 12-year history, leaving many to question the driving forces behind these boom-and-bust cycles.
Zooming out of its recent three-month surge, this article will take a high-level look back on Bitcoin’s price history and explain why sudden, volatile movements like what we’ve seen are nothing new to the cryptocurrency markets, and actually quite predictable feature of the macro adoption cycles.
Understanding Bitcoin’s past will allow us to chart it’s future. This brief history can be broken down into four distinct growth cycles.
1. Innovators / Developers [2009 -2011]
The first Bitcoin adoption cycle begins with an obvious group — the individuals who actually developed and created the technology behind Bitcoin’s blockchain. When Satoshi Nakamoto published Bitcoin’s Whitepaper in January 2009, it triggered of a frenzy among a niche group of cryptographers, cyberpunks, computer scientists and libertarians, spreading through message boards and chatrooms such as Reddit BitcoinTalk.org.
The first time Bitcoin actually gained value was on October 12, 2009 when Martti Malmi, a Finnish developer that helped Satoshi work on Bitcoin, sold 5050 Bitcoins for $5.02. This gave 1 Bitcoin the value of $0.0009.
The initial phase of price discovery began as Bitcoin entered into its first parabolic move. These innovators designated value on this new form of currency by further building on the technology’s security and efficiency, developing an ecosystem of exchanges & encrypted digital wallets, and discussing its role in a rebuilding economy among a growing group of followers who began transacting the digital currency among themselves.
By mid-2011 Bitcoin’s price reached a whopping $32 — a near 40,000% increases since Martti’s initial sale!
Bust #1 :The very innovators and early developers who built the burgeoning community just a few years earlier watched as their followers used their creation to purchase anything from pizza to video games accounts. It became clear that a new crop of tech savvy “nerds” were finding their way to Bitcoin, and it was time for the Innovators to cash in!
Bitcoin sank from an all-time high of $32 to $2 in a matter of months — a 90%+ correction.
Any sane investor would have left this asset for dead. Pack up your bags, the bitcoin fad is over…
2. Early Adopters / Tech Savvy Speculators [2011–2014]
Despite Bitcoin’s sinking price, exchanges and marketplaces continued to gain popularity beyond the community of developers behind the scenes — to a tech savvy crop of investors and early adopters looking to utilize the new digital currency for just that — a currency.
Some of Bitcoin’s earliest adopters used the digital currency on the “dark web” — in darknet markets (DNM) — where individuals could illegally and anonymously purchase drugs, weapons, fake IDs and much more from marketplaces not accessible through the regular internet, the most well-known being SilkRoad.
In addition to encrypted marketplaces, dedicated cryptocurrency exchanges began emerging, allowing more and more early adopters found their way to Bitcoin, many of whom did not intend to use it solely for illicit purchases, but rather collect and hold it.
As trading Bitcoin grew in popularity across niche tech-savvy pockets of the internet, Bitcoin experienced a second parabolic price move. From $2, the digital currency grew to over $1100 by 2014, with nearly 70% of all Bitcoin being traded on a single Japanese-based exchanged, Mt. Gox.
Bust #2: In February 2014, hackers stole over 850,000 Bitcoin from Mt Gox ($1billion at the time, $28billion today), resulting in the exchange being declared insolvent and ceasing operations. Thousands of individuals holding Bitcoin on Mt Gox wallets were left with nothing. Just months earlier Silk Road was shut down by the FBI. Having lost both the largest exchange and marketplace in a matter of months, Bitcoin sank from an all-time high of $1200 to $120 — a 90% correction.
Pack up your bags, the bitcoin fad is over, right?
3. Retail Investors / Accessibility Expands [2014 -2020]
Having once again witnessed Bitcoin fall into a deep correction, a new crop of investors began to take note?
“It’s fallen this much before and reached new highs — can it really be brought back from the dead again?”
With help from the emergence of more regulated US-based exchanges such as Coinbase and Gemini and a retail trading boom in Asia on exchanges such as Binance and Huboi, the crypto currency market experienced a renaissance.
With this renewed interest in trading the cryptocurrency markets, a flurry of Initial Coin Offerings (ICOs) — new blockchain based cryptocurrencies and utility tokens — flooded the market, allowing speculators to invest in 2000+ digital assets being dubbed by their developers as “the next Bitcoin”.
For the first time, the mainstream media became enamored by the meteoric rise of many of these cryptocurrencies, lead by Bitcoin. From CNBC and Bloomberg to CNN and NY Post, journalists couldn’t get enough of this mysterious new asset class rocketing to never-before-seen highs. This coverage reaching a broader audience than ever before drove the market to new euphoric highs — and we all know how this usually ends by now.
Bust #3: The media frenzy coupled with a flurry of new speculators finding their way into ICO’s brought about a 1999 dot com-esque bubble for Bitcoin and the broader market. The market simply outgrew the immature infrastructure that it was built on — unethical profiteers began using ICOs as an avenue to scam naïve and ill-informed investors, fluid regulation deterred Wall Street from joining the party, and investors who rode the recent rally decided it was time to take some profits, leaving many of the new investors “holding the bag”.
Bitcoin fell from a peak of $20,000 in December 2017 to less than $4,000 by January 2019 — an 85% correction.
4. Wall Street / Mainstream Accessibility [2020 — Present]
The broader ecosystem being built around Bitcoin and the many legitimate cryptocurrency projects never slowed, but rather expedited during this most recent lull. Important exchange regulations such as Know Your Customer (KYC) and Anti-Money Laundering (AML) were implemented across the globe, law enforcement cracked down on scammers, and access to the markets grew easier by the day in the form fully regulated US-based cryptocurrency exchanges and tradable products such as the Greyscales Bitcoin Trust or the growing number of bitcoin mining companies traded on the NASDAQ and NYSE.
This newfound maturity in the market — as described in my last article as Bitcoin growing out of it’s angsty teenage phase — coupled with the inflationary backdrop caused by Covid-19-induced stimulus efforts led to institutional investors — Wall Street titans and the world’s most wealthy individuals — putting more and more confidence in Bitcoin as a hedge against the possible decline of the US Dollar and rising inflation. This inflow of billions of new “smart money” dollars into the cryptocurrency market triggered Bitcoins 4th and most recent parabolic endeavor.
From March 2020 to the time of writing, Bitcoin has rocketed from a low of $3500 to more than $35,000 — an ROI of 1000% in just a matter of months. But if history has taught us anything, this rally may just be ramping up.
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The views above are opinions of the author and clearblock insights. They are not to be taken as investment advice.
