- Bitcoin has been through several bear markets before, always rising back to higher highs
- However, Dan Ashmore, our Head of Research, cautions against naïve extrapolation of past returns
- Until the past year, stock markets did nothing but rise during bitcoin’s existence.
- Bitcoin launched at the bottom of the stock market in 2009, and the bull run that followed was one of the longest in history.
- It needs to be considered, cautions Ashmore, that the sample size of bitcoin trading with any kind of liquidity is too small.
Bitcoin is volatile. This is also true: The water is wet and the sky is blue.
A quick glance at bitcoin charts will tell you everything you need to know about the meteoric rise and bone-crushing pullbacks generated by the asset over the past few years. Seriously, this should also be plotted on a scale.
Looking at the bitcoin markets, therefore, it is tempting to jump to the “we’ve been here before” conclusion. Bull market and bear market, easy come and easy go. or, as Jeff Bridges keep this poetically, “strike and gutter, ups and downs” in The Big Lebowski.
While bitcoin has fallen many times before and, at least at first, has always bounced back, I believe it is naive to extrapolate past resurgences to the present. Because no, we haven’t been here before.
To be clear, I am not saying that bitcoin will not reach new highs again. It can easily happen (I keep bitcoin as part of my portfolio, albeit through monitored allocation and following all the boring rules of diversification and risk management, but hey – that’s for another time). However, my point is that we have ground zero for the current situation. Despite surging 75% over the past six months, bitcoin is 60% off its high in the fourth quarter of 2021. If bitcoin has truly established itself on the mainstream stage over the past three years, many investors are treading water. are below.
Let me explain why things are different this time, and why assuming with blind faith that bitcoin will imperil an imminent upward move can be misguided. First, below is the biggest peak to trough decline in bitcoin history (recent/current highlighted in yellow):
Obviously, bitcoin has been here before. Correct?
No, this has not happened. See the dates above: all these drawdowns are from 2012 onwards. This is because bitcoin was only launched in 2009. In fact, it didn’t really have any sort of liquidity or infrastructure (such as exchanges or markets) until 2012 (and even then, there was very little liquidity).
And consider what has happened in the broader economy since bitcoin launched in 2009. On March 9, 2009, two months after bitcoin was launched, the Nasdaq hit a low of 1268.
Since then, markets have enjoyed one of the most remarkable, longest and explosive bull runs in recent history, as basement-level interest rates drove asset prices to all-time highs. By the end of 2021, the Nasdaq touched 16,057, the S&P 500 at 4,793. Since the aforementioned lows were in March 2009, that represents returns of 12.7X and 7.1X, respectively. A historic period of profit.
Presenting the returns of both the Nasdaq and S&P 500 since bitcoin launched in January 2009 (note – this is a few months before the stock market trough in March of that year and so returns are not the same as above) over the lifetime of bitcoin Visually shows the race in the markets:
Or perhaps the next chart is better, showing how much enthusiasm the stock market has had over the entire life of bitcoin over the period up to 2021.
Therefore, every single drop in bitcoin’s history has occurred when the broader financial markets were floating. That all changed in 2022, of course, when inflation spiked and the world’s central banks began raising rates at the fastest rate in recent memory.
Suddenly, for the first time in bitcoin’s existence, it was moving along block-by-block while financial markets elsewhere were plunging. And they were falling fast, with the S&P 500 falling nearly 20% in 2022, with the Nasdaq losing more than a third of its value. Not only were these losses the worst of any period in bitcoin’s life, they were in addition to the modest declines in 2011 and 2018. The only damage he had ever seen.
so it’s time Separate. Blind faith in bitcoin is springing up aggressively because the simple conclusion that this has been done before is a dangerous assumption. Again, bitcoin could easily do this, but it would be foolish to assume that this is a guarantee just because it has happened in the past.
The reality is, until last year, the world had no idea how bitcoin would trade outside of the zero-to-zero interest rate regime we’ve been operating in for the past decade. There is no trading history for bitcoin going back to previous recessions, no charts one can pull to assess how it underperformed inflation in the 1970s, no reference points for anything, But the stock market printing green candle after green candle.
Not only did all of those previous resurgences come amid periods of cheap money and expanding central bank balance sheets, but bitcoin markets were also incredibly illiquid. It took barely a drop of capital to move the price, as bitcoin exploded from a fraction of a cent to thousands of dollars per coin. Bitcoin’s existence at 14 years old has been brief, but its status as a financial asset of any kind of liquidity is worse than ever.
So, one last time: This is not a predictive piece about the future of bitcoin. I don’t want to get into such muddy waters (not here, anyway!) Instead, this is a cautionary piece that we have such a small sample size to work with when it comes to bitcoin, and This is important to know when assessing how it trades.
Bitcoin has never before experienced a bear market in a broader economy. So far. Ignoring that important fact is a dangerous game.