BULL RUN REDUX

The underpinnings of bitcoin’s bull run look way more solid this time

Obsession
Future of Finance
Obsession
Future of Finance

It’s déjà vu for bitcoin believers. Three years ago, in the dying months of 2013, the cryptocurrency took off on a historic bull run that would push its price to an all-time high of nearly $1,200. Bitcoin is approaching those highs again now, hitting $968 in trading today.

Take a look at this chart:

The 2013 rally came to a crashing halt: Bitcoin was trading for as low as $340 six months later. Today’s rally could end the same way, but there are important differences that suggest it might not. Here they are:

The biggest bitcoin exchange isn’t a giant, unsecure, fraud—as far as anyone knows, anyway

Part of the reason why the bitcoin price soared during the 2013-14 rally was because the biggest bitcoin exchange at the time, Mt. Gox, was slowly imploding—but no one knew it yet.

Among the many problems later discovered with the exchange, there’s suspicion that prices and volumes on Gox were being manipulated by a bot (named “Willy” by amateur sleuths), meaning prices on the exchange were skewed upwards.

Gox chief executive Mark Karpeles, who oversaw the carnage, was arrested by Japanese police in August 2015 and charged with embezzlement. Hundreds of millions of dollars in customer funds remain missing. He’s currently out on bail awaiting trial.

Today, three exchanges in mainland China dominate the bitcoin-yuan trade, which accounts for most of bitcoin’s current trading volume, while half a dozen firms take the lion’s share of the bitcoin-dollar trade. Some of these exchanges are even regulated by government agencies. This means the bitcoin price today is less dependent on one major exchange.

Way more people, including Wall Street, are trading bitcoin today

The 2013-14 rally was built on relatively thin trading volumes. In December 2013, for instance, about 7 million bitcoins changed hands among traders. That figure has grown 16-fold, with 113 million coins being traded on exchanges this month.

As trading volumes have grown, so has the composition of traders. Bitcoin today is traded by a range of individual and institutional investors, involving venerable names like commodities giant DRW. Bitcoin’s improved liquidity is no guarantee of a lofty price, but it does provide a more solid foundation for bitcoin’s current levels.

The “war on cash” exploded this year, normalizing bitcoin

The death of cash has been talked about for a while, but old-fashioned notes and coins appeared to be under serious assault this year. The prime example is India, where Prime Minister Narendra Modhi’s demonetization plan has led to a spike in demand for bitcoin there.

In countries like Venezuela, cash became a victim of hyperinflation. A stateless digital currency like bitcoin turned out to be a potent antidote to the bolívar’s plummeting value—and a hedge against further government meddling (read this eye-opening account of bitcoin mining in Venezuela from Reason to understand how the digital currency has become a life or death business there).

People already know about bitcoin

During the 2013-14 bull run, people were just getting to know this novel new thing called bitcoin. Google Trends data, for instance, shows three major spikes in search interest for the keyword “bitcoin” on the search engine during those two years.

The spikes in search interest coincide with periods of major volatility for the cryptocurrency, lending support to the idea that floods of new traders bought and sold the asset as they heard about it for the first time.

By contrast, Google Trends data for “bitcoin” today is pretty much flat, with a slight uptick for the month. Market watchers are taking that to mean current prices are well supported by existing investors—and that the rally isn’t a full-blown mania… yet.

Google Trends data for “bitcoin.” (Google Trends)

…But bitcoin might still be wildly overvalued

Of course, there’s still a strong argument that even with all these factors taken into account, bitcoin is still wildly overvalued.

For instance, a killer app for the cryptocurrency still hasn’t emerged, despite the best efforts of Silicon Valley and Wall Street to find one. It’s still mainly a speculative financial instrument instead of the bank-killing, government-toppling, cash-replacing, revolution that its boosters said it would be.

Bitcoin’s trading volumes are also puny compared to major asset classes. For instance, gold, which bitcoin is often compared to, is traded to the tune of trillions of dollars annually.

Still, the bitcoin bull run of today, at least, appears to have developed a far stronger foundation than the legendary surge of three years ago.

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