How is the 2021 Bitcoin Price High Different from 2017?

Original author: Blockchain Robin

Preface

Almost every other day, Bitcoin hits a new all-time high (ATH) - the yearly close of $29,100 in December 2020. This comes after the previous high of $19,800 reached in 3 years. Bitcoin is gaining attention again due to the enthusiasm of newcomers and the usual speculation about future prices. The fact that Bitcoin continues to grow is an affirmation of its increasing legitimacy. Bitcoin's ATH in 2021 is indeed very different from that in 2017. The previous ATH, fueled by unregulated ICO speculation, was inconsistent with the organic growth and state of technology at the time and was therefore unsustainable. The continuous decline in prices in 2018 and 2019 was welcomed by many critics who saw their bearish predictions come true: "See, it was just a bubble, I was right!"

During the same period, many countries began a complex regulatory process, and institutional investors began to consider Bitcoin as a very interesting alternative to traditional assets. Since its inception, Bitcoin has undergone - and is undergoing - constant development to improve the network (such as increasing transaction speeds, reducing fees, increasing privacy and security). These and many other factors make this new ATH completely different from the previous ones. What changed? Let's analyze some of these factors.

1. Technology maturity and acceptance

The introduction of any new technology, especially one as disruptive as Bitcoin, is initially accompanied by hype. Only after time has passed and the hype has faded can the technology be fully evaluated and eventually introduced to the market.

In 2017, a $20,000 Bitcoin was mainly the result of hype and Fear of Missing Out (FOMO): early adopters were interested in the promise of the new technology, but most of the interest did come from speculators. 4 years later, after a 2-year consolidation period and renewed growth, Bitcoin has passed the initial hype period and is now positioned as increasingly mature, both from a legislative and technological point of view. In its favor, Bitcoin and the open source technology stack it relies on should not be considered a "static technology", as its development is continuous and improvements are often released - even some of which significantly change the characteristics of the network.

The following diagram illustrates a typical innovation adoption lifecycle. Bitcoin, which has not yet been adopted by the majority of early adopters, is sparking interest among the early majority of users, who now have a richer storyline to evaluate the technology and its value proposition.

Source: Charlie Karlsson

The technology life cycle is reflected in four stages.

• Research and development phase.

• The rising stage is when the paid costs have been recovered and the technology begins to accumulate strength.

• The mature stage, when the technology has stabilized.

• The decline phase occurs after the usefulness of the technology decreases to a certain level.

Even if it cannot be strictly applied to Bitcoin, the current state can be positioned as an ascending phase due to the singularity of the technology and the decentralized nature of the project: the initial challenges have been solved, the technology is relatively mature and can prove its value with existing use cases. An interesting consideration for this question is that the R&D phase of Bitcoin is an intrinsic requirement of the nature of the network and is always ongoing. In fact, everyone can make suggestions to improve the network in the form of Bitcoin Improvement Proposals (BIPs), which are then evaluated by the community and, if consensus is reached, implemented on the network. Here you can find a comprehensive list of all successfully implemented BIPs to get an idea of ​​how fast the Bitcoin network is developing.

2. Legislative clarity and institutional investors

It can be said that legislative clarity and institutional investors go hand in hand, as legislative clarity is fundamental to Bitcoin being considered a desirable alternative investment.

2.1 Legislation as legalization

In 2017, with a few exceptions, legislation around cryptocurrencies was almost non-existent. Most countries were reluctant to consider them within their legislative frameworks, and some moved to ban them. Currently, more than 130 countries have issued laws or policies on the subject. These rules cover a wide range of implications for cryptocurrencies, from the classification and definition of terms, to warnings to potential investors, restrictions on payments, and the regulation of ICOs. There are wide interpretations from a wide range of countries. For example, different countries classify cryptocurrencies like this, with different regulations on taxation:

Israel → Taxed as an asset

Bulgaria → Taxed as a financial asset.

Switzerland → taxed as foreign currency.

Argentina and Spain → Income tax is payable.

Denmark → Pay income tax and losses can be deducted.

UK → Companies pay corporation tax, unincorporated businesses pay income tax, and individuals pay capital gains tax.

Still, most of these regulations must be considered preliminary as most countries are working to establish a comprehensive legislative framework for cryptocurrencies. Globally, it can be said that the frameworks most conducive to the development and growth of the blockchain ecosystem can be found in countries such as Malta, Switzerland, and Singapore.

2.2 Institutional Investors and Bitcoin

In 2017, cryptocurrencies were perceived to have a strong anti-establishment narrative, and therefore had a fairly small investor base and appeal. No one on Wall Street was really talking about Bitcoin as an asset or investment. Many prominent investors, such as Buffett, Bill Gates, and Jamie Dimon, continued to describe Bitcoin as “rat poison” and therefore worthless.

Three years later, the situation is very different: an interesting report from Greyscale Investment (2020) paints a completely different picture from 2017, showing that more and more investors are familiar with Bitcoin, up 11% year-on-year, and even believe that Bitcoin is slowly moving towards mainstream acceptance. In 2020, more than 62% of surveyed users claimed to be "familiar" with Bitcoin.

Source: Greyscale 2020 Bitcoin Investor Report

While retail investors are paying more attention to Bitcoin, there are more and more investment tools for institutional investors. Greyscale recently launched their Bitcoin Trust, an investment tool that allows investors to trade shares of a fund that holds a pool of Bitcoin. According to Bitcointreasuries.com, Greyscale holds 546,544 Bitcoins, which is about 70% of the 775,137 Bitcoins held by publicly traded companies. As shown in the figure below, Grayscale is doing well: just recently, business intelligence company MicroStrategy purchased more than $1 billion in Bitcoin (about 70,000 BTC). In addition to companies that invest directly in Bitcoin, other companies such as PayPal also allow its user base (360 million) to invest in Bitcoin.

Not all investment vehicles are created equal: options and futures are speculative bets on future prices and therefore do not give investors any ownership of Bitcoin. In contrast, Greyscale and MicroServices purchase Bitcoins directly and therefore have full ownership of them - contributing to the overall supply and demand dynamics of the Bitcoin network. Below you can find a comprehensive list of all companies that invest directly or indirectly in Bitcoin, divided into publicly traded, privately traded and ETF-like.

Source: Bitcointreasuries.org

Issuing different investment instruments that cater to the different risks/exposures of each type of investor contributes to a virtuous cycle of benefits and increases accessibility to Bitcoin for traditional investors - an example of which is the record-breaking open interest in Bitcoin options, now reaching an ATH of over $7 billion - a 400% increase since September 2020.

Source: IntoTheBlock

The increasing number of investment tools, coupled with clearer legislation, has led to a paradigm shift in investors' views on Bitcoin. This has opened up the possibility of developing entire derivatives and credit markets, as well as creating services to mitigate the complexity and security risks stimulated by holding large amounts of Bitcoin. For this problem, some companies - such as Fidelity, have developed services as early as 2018: 1. Provide custody services for cryptocurrency assets for institutional investors to safeguard their large holdings; 2. Allow investors to use Bitcoin as collateral for transactions.

Today, it has become easier for institutional investors to hold and invest in Bitcoin, both from a regulatory and practical perspective. This trend is likely to continue over the next few years, and Bitcoin will soon be seen as a "mainstream" alternative asset.

3. On-chain indicators

The next section relies purely on on-chain discussion metrics such as demand and supply, the number of Bitcoin holders, and Bitcoin’s overall dominance over altcoins. Since Bitcoin issuance is constant (6.75 BTC every 10 minutes on average), increased attention from retail and institutional investors is likely to lead to a significant increase in demand — and price.

3.1 Bitcoin Split. Bitcoin Dominance and Alt Coins

Bitcoin has experienced a price increase of over 160% in 2020, mirroring most other cryptocurrencies. In the previous bull run of 2017, the price increase was driven by the speculative phenomenon of ICOs, where new coins were minted out of thin air, mostly without any value proposition. In particular, in December 2017 and January 2018, the entire cryptocurrency market saw an irrational increase in market capitalization. Smaller cryptocurrencies grew by x2, x3 in a week. This trend is reflected in Bitcoin’s dominance ratio, which measures the total market capitalization of Bitcoin versus Altcoins. At the peak of the hype in 2017, Bitcoin dominance averaged about 82% throughout the year, only falling as low as 40% during December. The trend since then has been consistent: while Bitcoin reached a new ATH, most other cryptocurrencies did not recover from the ensuing bear market and are now valued at much lower levels than their historical ATHs. Bitcoin’s growing dominance over Altcoins, now at 70%, is a reflection of this split.

Source: TradingView

It can be said that Bitcoin has now split from all other currencies due to its special properties. Cryptocurrency users have reached a silent consensus. Bitcoin is a currency, but other currencies are completely different from Bitcoin.

3.2 Evolving Network

The Bitcoin network is stronger than ever, and this credibility is proven.

1) The Bitcoin network’s hash rate has reached an ATH. It represents the total computing power provided by miners to maintain the network. As a decentralized peer-to-peer network, Bitcoin relies on electricity provided by miners to operate. A high hash rate is a sign of a healthy Bitcoin network. The higher the hash rate, the harder it is for malicious actors to perform a 51% attack on the network.

Source: IntoTheBlock

2) The number of Bitcoin addresses also reached ATH: There are now more than 33 million wallets holding Bitcoin balances, a 16% YOY increase from 28 million in January 2020.

Source: IntoTheBlock

Among them, 96.92% of the addresses are in a profitable state, only 1.39% of the addresses are in a loss-making state, and 1.69% of the addresses are in a break-even state (data as of January 1, 2021).

Source: IntoTheBlock

3.3 Comparison between holders and traders

Another interesting metric concerns unspent transaction outputs (UTXOs). In a nutshell, they can be compared to the cumulative available balance on the Bitcoin network: the amount of money left after executing transactions.

The average holding time of one Bitcoin is 3.1 years. In addition, more than 21.9% of Bitcoin (4 million BTC) has not been moved for more than 5 years, 11.92% (2.2 million BTC) is 3-5 years, and 13% (2.5 million BTC) is 2-3 years. Only about 5% (1.1 million BTC) of Bitcoin was moved last week, and 7% (1.34 million BTC) was moved between last week and last month. In 2017, short-term transactions - highlighted by the red and yellow areas - were very common, while now most users choose to hold Bitcoin - exemplified by the green and blue areas.

Source: IntoTheBlock

Thus, 64% of total Bitcoin addresses are considered holders - a strong increase considering that there were 17.4 million in December 2019 - because they have not moved their Bitcoin for more than 1 year, 24.5% (8 million) are considered volatile (1-12M), and only 11% (3.7 million addresses) of Bitcoin users are considered traders (<1M). The overall trend shows that the trend of holding Bitcoin for a short period of time and not trading Bitcoin is becoming more and more obvious.

4. Bitcoin: A scarce and deflationary commodity

Bitcoin is a commodity that becomes increasingly scarce over time. The finite nature of Bitcoin is often underestimated and is undoubtedly one of its most attractive and interesting features. Every four years, the amount of Bitcoin released is cut in half until all 21 million Bitcoins are mined, which is estimated to happen in 2140. The most recent halving took place in May 2020 and reduced the reward given to miners for processing Bitcoin transactions from 12 Bitcoins per block to 6.75 Bitcoins. As a result, this also increased the electricity production cost of a single Bitcoin. To compensate, today’s reduction in supply is met by an increase in demand, both from retail investors and institutional players who have purchased high amounts of Bitcoin - as described in the previous section.

Bitcoin is often compared to gold as a store of value due to its characteristics such as divisibility, portability, and scarcity. The Winklevoss brothers (co-founders of Facebook) even argue that Bitcoin is better than gold due to the fact that it is "the only scarce commodity in the universe" because in the future, advanced technology will allow us to obtain gold through asteroid mining. Due to its deflationary nature, Bitcoin certainly also represents a safe haven for people from countries such as Venezuela, Turkey, and Iran where economic conditions are poor or where economic sanctions have led to severe currency inflation, where it can be used to send remittances back home, for international trade, or simply to pay for necessities. If traditional fiat currencies continue to experience high levels of inflation and volatility in the near future, more people will look to Bitcoin as a safe asset to protect their wealth from economic instability and inflation.

5. Last but not least

Bitcoin is now 12 years old and is the most secure financial network in the world: it safely stores more than $500 billion, has an uptime of more than 99%, and has never been hacked. It is increasingly being legitimized by regulators and attracts the attention of retail and institutional investors as an alternative asset. Today, the price of 1 Bitcoin hovers above $30,000, 50% higher than the previous high in 2017, which also confirms a strong upward trend . .

The technology stack behind Bitcoin is very atypical: open source, decentralized, and encrypted, which is the foundation of network decentralization and privacy protection. One point that needs to be emphasized is that whether it is technology, legislation, or the application of Bitcoin as a technology and currency, it is always ongoing and cannot be considered unchanging - doing so seriously underestimates its flexibility. Bitcoin is the liquid currency of the 21st century: programmable and constantly improving.

The adoption cycle of highly disruptive technologies is necessarily long: when it was first invented in 2009, the concept was almost utopian, few banks understood it, and banks called Bitcoin "techno-populism". These concerns were reasonable, and the current situation cannot be blamed for this reasoning. However, the environment has changed profoundly since then. The four major developments pointed out in different chapters have led to a completely different environment, which is now more receptive to Bitcoin from both an ideological and practical perspective.

It is impossible to predict the future application or future price of Bitcoin. Instead, it is predictable that the world will gradually get used to Bitcoin: eventually, countries will slowly go through the cycle of rejection and acceptance, recognize the value of Bitcoin, and develop corresponding legislative frameworks; the speed, security, and practicality of the network will continue to improve, and there will be more use cases; more investment tools will be created to cover all investors.

All of these reasons explain “How will the new Bitcoin price high in 2021 be different from 2017?”