The current Crypto Bull Run is different from 2017
The sentiment in the crypto space is similar to the boom and following bubble of 2017/2018 but there are some major differences
In the last two months, Bitcoin’s price rose from around USD 10k per Bitcoin to a new all-time high of around USD 19,8k. Not only did Bitcoin increased greatly in value but, also did most of the other major cryptocurrencies such as Ether and XRP with the total market cap increasing from USD 350bn to USD 550bn.
The current market reminds many crypto veterans of the boom and bust period of 2017/2018, where the crypto market made similar massive gains and then crashed. Even though market movements are currently like 2017, there are major differences such as the type of investors, the macroeconomic environment, and the usability of applications.
Institutional Investments & Adoption
The first difference between 2017 and 2020 is the kind of investors that enter the crypto space and drive prices up with an increasing demand. In 2017, the price increase was driven by retail investors such as your aunt or neighbor who had zero ideas about Bitcoin and blockchain technology but felt they were the next Warren Buffet.
The current bull run is indirectly and directly lead by institutional players who know what they are investing in. Shortly before the current boom, multiple companies such as Square or MicroStrategy made headlines in the news for investing several hundred million dollars into Bitcoin as a hedge against inflation in the current financial recession.
Further, the number of funds that made investments into crypto increased as well. Just this week, Guggenheim Funds Trust filed an amendment with the U.S. Securities and Exchange Commission (SEC) to allocate up to 10% of its over USD 5bn assets into Bitcoin. The New York Digital Investments Group (NYDIG) too joined the party and raised $150 million for two new funds to invest in cryptocurrencies.
Indirectly institutions further increased the demand for Bitcoin & Co by offering crypto assets to their clients. Besides Revolut, who offers crypto for some time, PayPal was the biggest name to decided to offer their 350 million customers access to cryptocurrencies. Visa also increases adoption by supporting the issuance of a USDC stablecoin credit card going live in 2021. This means that around 60 million merchants can send and receive USDC payments on their platforms.
The current boom in crypto is not because of an increased demand from uneducated retail clients as in 2017 looking for short term gains but from large institutions investing long-term. The more hodlers are in the market, the less volatile it becomes.
People often criticized Bitcoin for not having a real use case, while this statement should be questioned, one could argue that we have such a use case today compared to 2017. In 2017/2018, people mainly invested in speculation and to make big gains in a short time. While there are still many investors who see their crypto investments as pure speculation, this is not the case for institutional who drive the market.
Bitcoin is establishing itself as the digital gold. In the current market environment created by the COVID-19 pandemic, national banks started to print endless amounts of cash into the economy to keep things running. The results of quantitative easing are so severe that 20% of all US Dollars in circulation have been printed this year.
Bitcoin has the perfect characteristics for this environment. Its limited supply with a hard cap of 21 million coins has an extremely attractive value proposition for institutional as well as retail investors as a hedge against inflation and an independent asset free of governmental control.
One could say that while investing in Bitcoin was more speculative driven in 2017 we have a real use case, namely hedging against inflation in 2020, that motivates many to invest in this young asset class. The current economy makes it less abstract to understand Bitcoin’s value proposition. This trend is expected to continue as the crisis is not over, and more money will be printed soon. Even if the vaccine for COVID-19 is successful financial stimulus will continue for some years to come.
DeFi instead of ICOs
In 2017 the crypto space was overflooded by ICOs, something we do not see a lot anymore in the crypto space. While there is nothing wrong with ICOs per se that was compared to the crypto versions of IPOs, estimates concluded that around 80% of the ICOs in 2017/2018 were scam projects.
In 2017 most investors had zero ideas of what they are investing in. A professional-looking webpage with a Whitepaper using fancy words such as “machine learning blockchain explorer” or “AI integrated smart contract oracle” and a wallet address was enough that many people invested into these “disruptive projects.” Even if not bad intended, most ICOs were more PoC than actual applications.
If we look at what currently drives the most interest in crypto besides Bitcoin, it’s undoubtedly DeFi applications build on Ethereum. Contrary to most ICOs, DeFi applications are not a promise for the future but are useable and create an added value. The applications are open source, and everybody can therefore check the code to see if they really offer what they promise compared to untransparent ICOs.
Of course, some DeFi applications are scams as there will be everywhere there is a market hype. Still, their number is not comparable to scam ICOs. DeFi applications proved what most ICO could not, namely that there is a real added value by leveraging blockchain technology. This also explained the high surge and use of such applications that took off in 2020. This trend can be expected to continue, which attracts more users, and by time applications will have a similar UX/UI as we know from internet apps.
Will there be a second bubble?
This is the one-million-dollar question. Even if we see multiple signs of maturity in the crypto market such as institutional adoption and usable products and services we should not forget that the market is still young and small compared to other asset classes with multi-trillion market caps.
If at some point in time Bitcoin gets back into mainstream media attention, which could be soon as Bitcoin reached a new all-time high, retail investors could come back into the space and push prices unsustainably high by making uneducated investments. This FOMO could again trigger another bubble.
Nevertheless, if this scenario would happen, I believe the drop would be less extreme than last time and stabilize a lot faster as hodlers (like myself) and institutions would buy the dip. As the number of people and organizations who believe in the long-term value of Bitcoin & Co. is increasing day by day.
The current bull run proofed all the people wrong who had written off Bitcoin & Co. The space has never been so exciting as it is now, and more and more players enter the market. The journey has just begun.
Note this is not financial advice but a list of observations. Investing in crypto is still considered a high risk. Only invest as much as you are willing to lose.