- Bitcoin has experienced many bear markets in its history, always surging to new highs
- Our head of research, Dan Ashmore, cautions against simplistically estimating historical earnings.
- Until last year, the stock market only rose while Bitcoin existed
- Bitcoin was launched in 2009 when the stock market bottomed out, and the subsequent rally was one of the longest in history.
- The sample size of bitcoin transactions with any kind of liquidity is also small, but this needs to be taken into account, warns Ashmore
Bitcoin is unstable. It is also true that the water is wet and the sky is blue.
A glance at Bitcoin’s chart reveals everything there is to know about the meteoric rises and bone-crushing declines this asset has produced over the years. In practice, it should also be plotted on the scale.
So when you look at the Bitcoin market, it’s tempting to jump to the conclusion that you’ve been here before. Bull and bear markets, easy to come and easy to leave.Or as Jeff Bridges put it The Big Lebowski’s “Strike and Gutter, Ups and Downs” is very poetic.
Bitcoin has fallen many times before, and has always bounced back, at least before, but I think it’s simplistic to extrapolate past rebounds to the present. No, because we’ve never been here before.
To be clear, I am not saying Bitcoin will not rise to new heights again. It’s easily possible (even though I follow all the boring maxims of diversification and risk management via supervised allocations, I have bitcoin as part of my portfolio, but hey, it’s also on another occasion). But what I’m trying to say is that the current situation is of no help. Despite rising 75% over the past six months, Bitcoin is down 60% from its Q4 2021 highs, and over the past three years, Bitcoin has truly established itself on the mainstream stage. Many investors find themselves underwater when they open positions.
Let me explain why things are different this time, and why it might be wrong to assume with blind confidence that Bitcoin will soar soon. First, below is the largest peak-to-trough drawdown in Bitcoin history (recent/current drawdown highlighted in yellow).
Clearly, Bitcoin has been around for a long time. right?
No, it’s not. See the dates above. All of these drawdowns are from his 2012 onwards. This is because Bitcoin was just launched in his 2009. In fact, Bitcoin did not have any liquidity or infrastructure (exchanges, markets, etc.) until 2012 (and even then, liquidity was very thin).
And consider what has happened to the broader economy since Bitcoin was launched in 2009. On March 9, 2009, two months after Bitcoin launched, the Nasdaq hit a low of 1268. The S&P 500 similarly recorded a bottom of 676.
Since then, the market has enjoyed one of the most notable, longest and most explosive bull markets in recent history as underground rates pushed asset prices to dizzying all-time highs. By late 2021 at its peak, the Nasdaq reached a level of 16,057 and the S&P 500 reached a level of 4,793. Since his March 2009 low mentioned above, this equates to returns of 12.7x and 7.1x respectively. An era of historic gain.
It shows returns for both the Nasdaq and the S&P 500 since Bitcoin launched in January 2009. It’s not as sympathetic) visually illustrates the market surge over Bitcoin’s lifetime.
Alternatively, perhaps the following chart is better, showing just how tumultuous the stock market will be throughout Bitcoin’s lifetime through 2021.
Therefore, every drop in Bitcoin’s history occurred while the broader financial markets were doing well. Of course, all that changed in 2022 when inflation accelerated and global central banks began raising interest rates at the fastest pace in recent memory.
Suddenly, for the first time since Bitcoin’s birth, Bitcoin began to move block by block while other financial markets fell. And they fell quickly, with the S&P 500 dropping nearly 20% in 2022 and the Nasdaq losing more than a third of its value. Not only were these losses the worst of any time in Bitcoin’s history, but aside from the smaller declines in 2011 and 2018, It was just a loss that we had never seen before.
So this time different. It is a dangerous assumption to blindly believe that Bitcoin will rebound positively because of the simple conclusion that it has rebounded positively in the past. Again, Bitcoin could easily do just this, but it would be foolish to think that it is guaranteed because of what happened in the past.
The reality is, until last year, the world had no idea how Bitcoin would trade outside of the zero-interest-rate vacuum we’ve been operating in for the past decade. Bitcoin has no trading history that goes back to previous recessions, no charts can be constructed to assess how Bitcoin weathered the inflation of the 1970s, and the stock market continued to drop blue candles. There is no reference point other than recording.
Not only have all of the previous revivals occurred amid currency depreciation and central bank balance sheet expansion, but the Bitcoin market was also incredibly illiquid. When Bitcoin exploded from a few cents to thousands of dollars per coin, it hardly needed a single drop of capital to move the price. Bitcoin’s existence itself is short at 14 years, but its status as a financial asset with all kinds of liquidity has become even shorter.
Last but not least, this is not a prediction about the future of Bitcoin. I don’t want to be in such murky water (not here anyway!). Rather, this is a warning that the sample size we work with is very small when it comes to Bitcoin, and that it’s important to be aware of that when evaluating how Bitcoin is traded.
Bitcoin has never experienced a bear market across an economy before. until now. Overlooking that important fact is a dangerous game.