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Accounting for Bitcoin’s 9,000,000% rise in a decade

From The Straits Times: Emerging from the ashes of the financial crisis, digital token bitcoin was created as a bypass to the banks and government agencies mired in Wall Street’s greatest calamity in decades.

It was slow to break through, muddied by a slew of scandals: fraud, thefts and scams that turned away many and led to closer regulatory scrutiny. But once it burst into the mainstream, it proved to be the decade’s best-performing asset.

The largest digital token – trading at about US$7,200 – has posted gains of over 9,000,000 per cent since July 2010, data compiled by Bloomberg shows.

“Bitcoin really captured that wild technology enthusiasm that ‘this time is different’,” said Mr Peter Atwater, the president of Financial Insyghts and an adjunct professor at William & Mary university in Williamsburg, Virginia.

Bitcoin’s performance over the past 10 years, even with its huge run-up and subsequent mega-crash, leaves all others in the dust. It is a massive windfall for those who held on the crypto currency through its ups and downs.

Nothing else comes even close to beating it. The S&P 500 merely tripled in that period. An index that tracks world markets has more than doubled. Gold is up 25 per cent. Some of the best-performing stocks in the Russell 3000 – including Exact Sciences – are up about 3,000 per cent.

Partly, the monster return is a reflection of the calculus behind bitcoin’s jumping-off point: the token was not worth anything when someone named Satoshi Nakamoto launched it on Halloween 2008.

Designed as a method of exchange that can be sent electronically between users worldwide, it did not have a centralised control network. Bitcoin, instead, is run by a network of computers that keep track of all transactions on the blockchain ledger. For many, that technology was reason enough to buy into the idea.

Then there are the enthusiasts who saw in bitcoin’s technology a promising way to change the global financial system.

“This is the first time that there’s a real separation – just like church and state – you have a separation of money and state,” said Mr Alex Mashinsky, founder of Celsius Network, a crypto-lending platform. “That’s the innovation, that’s the excitement.”

But bitcoin was slow to take off, notching its first transaction two years after its creation, when someone used it to buy pizza. Since then, the first-born token’s price has catapulted, doubling many times over, and hundreds of imitators have cropped up – some with more success than others.

Many of those who got in early stayed faithful, watching as it made its way through a boom and bust cycle unrivalled by almost anything else over the last decade.

At the beginning of 2017, bitcoin jumped above US$1,000. By mid-summer, it had more than doubled. Insanity was unleashed.

By year-end, it hovered above US$14,000. But as swiftly as it ran up, it fell even faster. By the end of 2018, bitcoin barely budged above US$3,000. Yet shortly after its crash, it embarked on another huge rally, this time reaching as high as US$13,800 in the summer of 2019.

“Certainly the numbers are what appeals to investors,” said Mr David Tawil, president of ProChain Capital. “The next 10 years need to be a totally different stage of growth based on totally different factors than the first stage.”

As much as it has made a fortune for speculators and some thieves, bitcoin’s survival will rest on further adoption. It is not being used as a widespread medium of exchange. A few large retailers are accepting payment in bitcoin but it has not been the large-scale embrace so many had predicted.

Scams are still running rampant. Interest is waning and consolidation among large owners is at a higher level than it was during the height of the 2017 bubble, which means that their influence over prices could be increasing.

Projections for the next decade abound. In the 2020s, mass adoption is sure to take off, they say. Blockchain technology will revolutionise and solve every problem in the world. But regulatory scrutiny is likely to intensify, with central bankers paying even closer attention than before.

In the more immediate term, some speculators forecast 2020 might be less fraught with volatility, given its upcoming halving, whereby the number of coins awarded to so-called miners who process transactions is cut by 50 per cent. The coin’s previous cut, about four years ago, coincided with a run-up in its price.

To CoinList’s Mr Andy Bromberg, the halving is already priced in. “Maybe it’s been overpriced in and everyone’s bought into this thesis and we see a dip post-halving,” said the firm’s co-founder and president. “That would not shock me.”

But beyond next year, “bitcoin is finding its own narrative as digital gold”, he said. “It feels like that narrative is picking up steam and it’s breaking away on its own. I would define success for most crypto assets as doing exactly that,” he added.