The 2022 bitcoin price crash: why this one is different
Gut-wrenching price drops. Margin calls and trader liquidations. Company and project insolvencies. Painful reminders of “not your keys, not your bitcoin”.
If you’ve followed cryptoassets for long enough you’ve seen this movie before (numerous times, perhaps).
On the 18th of June the price of bitcoin was down 74% from its 10 Nov. 2021 all-time high of nearly $69,000 USD. Many understandably are wondering how the present situation compares with the three prior “crypto winters” (2018–19, 2014–15, 2011–12).
In the Old Testament, Solomon mused how there was “nothing new under the sun”. Another crypto bull market cycle ending in price-plunging carnage would indeed be nothing new. But some things have changed.
This bitcoin price cycle was different
There continues to be an intense debate in the marketplace over what a bitcoin should be worth, and over what time frame further adoption will occur.
This mix of uncertainty, disruptive potential, and our human tendency to become irrationally exuberant (less charitably known as “greed”), is why bitcoin’s price semi-regularly rises, and then crashes.
There have now been at least 15 episodes where bitcoin’s exchange rate against the US dollar dropped 30% or more, and eight episodes (including the most recent) where the exchange rate declined by more than 70% (Table 1).
If the 74% drawdown marks this cycle’s low it would rank as the 5th biggest peak-to-trough percentage drop.
But this is by far the largest market value loss in bitcoin’s history: bitcoin’s total market value peaked at just under $1.3 trillion USD in Nov. 2021 and dropped below $400 billion on Saturday, erasing nearly $1 trillion in market value. And the total market value of the nearly 20,000 cryptoassets has sunk from approximately $3 trillion to under $800 billion.
The standard legal disclaimer in finance that “past performance is no guarantee of future results” also rings true here: the Saturday 18 June drop also represents the first time a previous price cycle high (~$20,000 in Dec. 2017) was pierced during a subsequent new all-time high cycle.
While bitcoin’s price has subsequently rallied to remain around or above the 2017 peak, many bitcoiners have been rattled by the breakdown of this once sacred pattern.
Was bitcoin falsely advertised as an inflation hedge?
Given recent data it is reasonable to question bitcoin’s inflation fighting bona fides: while official inflation data has been accelerating higher this year, bitcoin’s price has been accelerating lower in near lockstep.
As any statistician or financial analyst knows, the time period the analyst chooses to measure can make a decisive difference in judging an asset’s performance.
Arguably the best time to buy an inflation hedge is when the very initial seeds of outsized inflation are being planted. For example, in anticipation of the massive fiscal and monetary response to COVID-19, Paul Tudor Jones purchased bitcoin as an inflation hedge in spring 2020.
And the best time to sell the inflation hedge is arguably when/if the central bank gets serious about combatting inflation. For example, when Fed Chair Powell conceded in November 2021 that it was time to “retire” the Fed’s preferred word for describing the inflationary environment (“transitory”).
Now, with spring 2020 - Nov 2021 set as our measurement goal posts, behold how bitcoin performed spectacularly as advertised as an inflation hedge (up ~15x from roughly $4,500 to $69,000).
There is also the more fundamental question of how we have been measuring inflation over the past several decades. Anyone declaring the failure of bitcoin to hedge inflation hasn’t been scrutinizing the methodology used to measure inflation, or is cherry picking shorter time periods to make this claim.
If we zoom out and look at bitcoin’s price over the past decade, a period of substantial rising costs for many of the most desirable goods and services — housing, health care, education, childcare — the longer-term abilty of bitcoin to preserve value alongside these rising costs is undeniable (Figure 1).
Is bitcoin just a risky tech play?
Another analytical trick in framing judgment of an asset is in the selection of which asset it is compared against.
The tech-stock dominated NASDAQ, which bitcoin is often compared and price correlated with during the first half of this year, has now nearly dropped back to its pre-pandemic price levels of January 2020. In contrast, bitcoin today remains up more than 100% from the start of the pandemic.
Bitcoin has also historically been uncorreleated with tech stocks, or any other asset class for that matter, and of late has shown signs of returning to this trading pattern.
Should we really be so quick to declare bitcoin just another risky tech play, fated to track the stock prices of centralized Big Tech, based on just the last few month’s of data?
What exactly is bitcoin?
Financial media and television in particular rightfully desire simple narratives.
Tidy labels for bitcoin like “digital gold”, “inflation hedge”, “risky tech play”, or the more derogatory “schmuck insurance” have helped communicate some elements of bitcoin’s value proposition to newcomers. But they have also oversimplified what is a complex, multidimensional, and still evolving technology.
So what’s the right narrative for bitcoin?
As one cryptocurrency OG recently put it, bitcoin represents “neutral money” that serves as “the right building block for digital value”.
Unpacking that statement, today we can say that bitcoin is emerging as:
- neutral cross-blockchain collateral for decentralized finance
- a platform for stablecoins
- a network for securing decentralized digital identity
- and much more
Each of the above and other use cases are not fully captured in “digital gold”. But because these use cases are challenging to articulate in a two minute CNBC interview, bitcoin commentators (myself included) have often resorted to soundbites that only scratch the surface of what bitcoin is today, and (more importantly) what it has the potential to become.
But I would argue that focussing on the what is bitcoin narrative risks overlooking the far more important “why bitcoin?”.
Economic uncertainity. Automation. Institutional decline. Efficiency. Wealth inequality. Software is eating the world. Push as well as pull factors. The list for why bitcoin is long and also still evolving.
What else is different this time?
As we assess the damage of the 2022 price crash and imagine what’s next, it is worth noting several substantive differences between the state of cryptoassets today and the last great bull cycle (2017):
- More than just bitcoin and ethereum. New asset categories like non-fungible tokens (NFTs) have brought artists, event organizers, gamers, collectors, musicians and others not previously drawn by bitcoin’s monetary qualities into the world of cryptoassets. Not only has decentralized finance (DeFi) created access to trust minimized and permissionless financial services like exchange and money markets, but in the in the last 2+ years DeFi has weathered three dramatic price dislocations. The 100x growth in the value and use of stablecoins over the past several years, and their ongoing integration into traditional payments cards and smartphone apps, is in my view poised to return the term cryptocurrency to accurate use. All of the above utilize and drive demand for “layer 1” protocols like ethereum and bitcoin. You can think of growth in these categories as akin to adding additional legs to a stool supporting overall cryptoasset adoption.
- More reliable data and information. While education may be the number one challenge today facing cryptoasset adoption, the number and diversity of quality educational resources has blossomed in recent years. A wide range of podcasts now exist to help both new and existing cryptoasset owners become better educated and informed. New reliable data and analytics from firms such as CoinMetrics, Kaiko, The Block, Nansen and Glassnodes have grown to compliment longstanding tools like the Blockchain.com Explorer. The “cryptoasset canon” — blogs, research reports, movies, books, etc — articulating the innovation underpinning blockchain technology has continued to expand and sharpen. More and more universities are adding blockchain technology to the curriculum.
- Cryptoassets are more integrated into traditional markets. This change has cut both ways. One consequence of Crypto-Wall Street convergence, reflected in rising bitcoin ownership amongst hedge funds and institutional players, is the increased correlation between traditional financial (TradFi) and cryptoassets markets. In other words, as goes the Fed and the price of tech stocks of late, so goes the price of bitcoin. But one upshot of convergence is many powerful Wall Street players now embrace bitcoin (and increasingly ethereum as well). Notable examples include the previously skeptical “Bond King” Bill Gross and influential macro trading legends like Stanley Druckenmiller, who view bitcoin as digital gold. Both institutional legitimacy and institutional grade trading and custody infrastructure now exist for cryptoassets. Over time, institutionalization of cryptoassets should result in reduced price volatility, better understanding of fundamental drivers, and lower price correlation than we have seen this year.
- Growing regulatory clarity. Helping pave the way for bitcoin adoption by institutions and companies like Tesla has been a steady improvement in regulations. Contrary to the still too-often heard accusation that “crypto is unregulated”, bitcoin is in fact regulated and has been since at least 2013. While more nuanced cryptoasset regulation is arguably warranted and can be expected in the wake of recent events, the notion that regulation on the whole has or will in the future be bad for bitcoin is unfounded.
- Rulemakers are adopting bitcoin. While some countries including China continue (unsuccessfully) to try and squash bitcoin, we have also seen a growing embrace of bitcoin by many policymakers. In the past twelve months two nation states — El Salvador and Central African Republic — made bitcoin legal tender. Despire significant external pressure from the IMF and mark to market losses estimated in the tens of millions of dollars, El Salvador appears unwavering in its determination to maintain some national reserves in bitcoin. Mayors in major US cities like Miami and New York have taken their salary in bitcoin. States such as Texas and Wyoming have crafted welcoming regulatory climates for blockchain innovation.
The biggest change
But if I had to single out the most significant difference between today and the last cycle it is how cryptoassets have crossed the adoption rubicon.
In 2017, my colleagues and I at the University of Cambridge published the first rigorous empirical research on total worldwide cryptoasset ownership levels. Our conservative estimate was that globally just under ten million people owned cryptoassets.
In other words, even though by 2017 bitcoin had already climbed arguably the hardest part of the adoption ladder — the journey from zero to a million+ users — mainstream adoption was still far from assured.
Today, various estimates from the World Bank and others place total cryptoasset use and ownership at approximately 200 million people. Both the sheer scale and growth rate are astounding, with the number of cryptoasset owners growing at a faster rate than the internet and personal computer. For something that didn’t exist 14 years ago this is pretty remarkable.
The road ahead
In its early years, a relatively small number of people realized that bitcoin had the potential to be the most disruptive economic technology invented in history.
With bitcoin ownership levels now in the hundreds of millions of people, and governments simultaneously embracing and cracking down, the stakes are orders of magnitude greater than when Wired magazine declared the death of bitcoin in the first crypto winter of 2011.
It is important to acknowledge that we are in uncharted territory and no one really knows how the story of bitcoin will ultimately play out. But what we do have in hand is nearly 14 years of bitcoin history to draw upon as we look ahead.
In the past decade, tens of billions of dollars of capital have been invested into cryptoassets, related applications and infrastructure. These investments represent a giant bet on digital freedom and property rights.
In terms of the next few months, much depends on forces (plague, war, famine) beyond the world of bitcoin. But the billions of dollars recently raised by investment firms that will be deployed over the coming months into NFT infrastructure, GameFi, DAO tooling, and other broader cryptoasset areas could mean Crypto Winter IV proves milder than past ones.
Looking out further, numerous surveys in recent years have shown that young people in particular see cryptoassets as an important part of their future. If demographics is destiny, this adoption characteristic may be the most significant element underpinning an optimistic outlook.
So should we expect this latest price plunge to follow the historical pattern, where bitcoin’s price eventually rebounds, achieves a new all-time high, and we see an even greater number of total bitcoin owners?
As always, past performance provides no guarantees. But there is something we can say. Such a result would be nothing new for bitcoin.
