By Steven McClurg, CIO; Bill Cannon, Head of Portfolio Management; Keith Black, Research Advisor
Both bitcoin and ether have a long and volatile price history, with bitcoin trading since 2009 and ether trading since 2015. Both coins started with a price generally below $1 and reached prices of $19,000 and $1,000 respectively. July 2022 marked the third distinct time period that bitcoin hit $19,000 and ether traded near $1,000. The first time was the peak price before the crypto winter, while the second time was the start of a strong bull market. With one bullish and one bearish precedent starting from these price levels, what can we learn from history to understand the potential price path of the two largest cryptocurrencies after July 2022?
Crypto Winter
Cryptocurrency prices have been generally volatile, as bitcoin has traded at $19,000 at three distinct time periods: December 2017, November 2020, and July 2022. The first time bitcoin exceeded $19,000 was the week of December 11, 2017, having risen 119% in the trailing eight weeks. This price increase was short lived, as bitcoin retreated 58% in the subsequent eight weeks, and fell to a weekly low of $3,252 at the bottom of the crypto winter, the week of December 10, 2018. That is, bitcoin lost 84% of its value December 2017 to December 2018 after hitting its previous high.
![BTC price](https://www.nasdaq.com/sites/acquia.prod/files/2022/09/02/Screen%20Shot%202022-09-02%20at%203.18.55%20PM.png)
Similarly, ether has traded at $1,000 at these three dates: January 2018, December 2020, and July 2022. Ether first reached $1,000 the week of January 1, 2018, rising 275% from a price of $308 at the beginning of November, 2017. Similar to bitcoin, this high didn’t last long, as ether fell 25% to $866 by the end of February, 2018, on its way to a subsequent low of $85 by December 2018.
![ETH price](https://www.nasdaq.com/sites/acquia.prod/files/2022/09/02/Screen%20Shot%202022-09-02%20at%203.18.59%20PM.png)
This 2018 time period is now generally called ‘crypto winter,’ as the large decline in prices led to a substantial chill in trading activity. It would take another two years for ether to again reach $1,000 and for bitcoin to hit $20,000, in December 2020 and November 2020, respectively. Price action subsequent to the late 2020 levels was extraordinarily strong, with bitcoin rising 71% in eight weeks on its way to a subsequent weekly high of $60,204 in April 2021, while ether rose 45% in eight weeks before reaching a subsequent weekly high in November 2021 of $3,928.
The bullish period leading up to the end of 2017 and the beginning of 2018 was a time of strong demand for ether and bitcoin, which were used to purchase initial coin offerings (ICOs). Around 800 initial coin offerings raised $20 billion in proceeds in 2017-2018. We believe investors had high hopes for the newly issued coins, which represented investments in projects that were in the nascent stage of simply presenting a business plan or a white paper. In the best case scenarios, the proceeds of the ICOs were seemingly used to pay salaries to programmers who made substantial progress on building these new crypto projects. In the worst case scenarios, the project likely never began or made much progress. By the end of 2018, many of the projects had failed, or even failed to make progress toward the proposed business plan. Around 30% of ICOs had lost nearly all their value by the end of 2018. The ICO boom ended quickly when the US Securities and Exchange Commission (SEC) stepped in, charging some crypto teams with fraud and others with selling unregistered securities. As the ICOs that were floated declined in value and the issuance of new ICOs dried up, the demand for bitcoin and ether subsided. Some ICOs were regular sellers of the crypto earned during their fundraising, which added to the selling pressure on the leading cryptocurrencies. Of course, the ICO boom wasn’t all bad, as some projects raising money included Tezos and Basic Attention Token, which are valued in July 2022 as noted on coinmarketcap.com at $1.4 billion and $600 million, respectively, far above the funds raised at their ICO.
The Bull Market and DeFi Summer
2018 was a tough year for both bitcoin and ether, as the calendar year return was -75% and -86%, respectively. 2019 wasn’t much better for ether, with a decline of 13%, which was especially disappointing, as bitcoin rallied over 80% in 2019. Ether made up ground in 2020, with a gain of 615% compared to 342% for bitcoin.
Demand for crypto picked up in 2020 and 2021 due to the rise of decentralized finance (DeFi) applications, many of which were built using smart contracts on the Ethereum blockchain. Decentralized finance includes borrowing and lending platforms, such as Aave and Compound, as well as decentralized exchanges, such as Uniswap.
During 2021, the total value locked (or invested) in DeFi projects rose from $18 billion to $247 billion, as investors sought to earn yield, leverage positions, or earn rewards for providing liquidity to growing cryptocurrency exchanges. Total value locked in DeFi remained above $150 billion through the end of April 2022.
Inflation, Stock Prices, and Terra Comes Back to Earth
The summer of 2022 is apparently another difficult time in crypto markets, with the Nasdaq stock market index declining by 16% in the three months ended July 1, 2022, as the US Federal Reserve bank has started to tighten monetary policy in the face of inflation exceeding 9%. As both stock prices and bond prices declined during this time of rising rates, cryptocurrencies have generally experienced an increasing correlation to stock markets, as traders are liquidating crypto positions to preserve capital during times of simultaneous declines in stock, bond, and crypto prices.
There are also crypto-specific events weighing on the price of both ethereum and bitcoin.
While DeFi Llama notes that total value locked (TVL) in DeFi protocols exceeded $200 billion at the end of April 2022, TVL fell below $60 billion by the end of June 2022. The key event was the $40 billion decline in the value of the Terra USD stablecoin in May 2022. This algorithmic stablecoin and related ecosystem promised yields of up to 19.5%, but were backed by the related Luna cryptocurrency, not fiat or unrelated cryptocurrencies. When it became clear that this system was unsustainable, both Terra USD and Luna lost nearly all of their value. This led to cascading liquidations, distress, and even bankruptcies of leveraged crypto investors such as Voyager, Three Arrows Capital, Celsius, and BlockFi. Note that the design of Terra USD is very different than other stablecoins. Stablecoins such as Binance USD, Circle USDC, and Gemini Dollar GUSD, hold US dollars off-chain in audited and regulated accounts. The algorithmic stablecoin DAI is created when investors deposit an overcollateralized amount of cryptocurrencies, such as ethereum or bitcoin. For example, a deposit of $17,000 of ethereum into the Maker DAI protocol will generally allow the withdrawal of $10,000 in the DAI stablecoin. As the collateral, such as ethereum, loses value, investors will likely be required to add more ethereum to their account or reduce their holdings of DAI.
The Future of Crypto
We now have at least two complete market cycles in crypto. First, the 2017 ICO boom, which saw ethereum move from $10 to $1,000 during 2017 only to fall back to $85 by the end of 2018 as the ICO market declined. Second, was the rise and fall of DeFi. From a price of $140 at the end of 2019, ethereum rose to over $4,000 in December 2021, followed by its decline to below $1,000 in June 2022 driven by the rapid liquidations of leveraged investors.
We believe these precedents show that the demand for crypto may be driven by key use cases such as ICOs and DeFi. The bearish view of this history is that crypto investors might be waiting for a new use case before resuming another bull market.
The bullish view of this history is that bitcoin and ether today have a similar valuation as at the end of 2017. What has changed in the crypto market over the last 4.5 years may show that the market’s largest two cryptocurrencies may have greater inherent value today than at the same price point in the past. While market prices ebb and flow, technology projects continue to be built and users continue to enter the crypto ecosystem.
One way to evaluate the value of a technology project is Metcalfe’s law, which states that the value of a network is proportional to the square of the number of users. Metcalfe’s law has been applied to the valuation of social networking stocks as well as bitcoin. Peterson (2018) noted that the price of bitcoin had a strong relationship to the number of wallets between 2011 and 2017. At the end of 2017, blockchain.com tracked approximately 17 million bitcoin wallets, while the number of wallets exceeded 83 million in July 2022. If Metcalfe’s Law (“Metcalfe’s Law as a Model for Bitcoin’s Value,” Timothy F. Peterson, Alternative Investment Analyst Review, Q2 2018) were to hold today, a 480% growth in bitcoin wallets over the last 4.5 years would predict the value of bitcoin is more than twenty times its value at the end of 2017. Rather than valuing bitcoin at its peak price at the end of 2017, if we back up bitcoin prices by six months, returning to the June 30, 2017 price of $2,500, the network growth of bitcoin alone could justify a current value of over $50,000, (which is 480% squared multiplied by $2,500).
While the price of bitcoin and ethereum today is similar to the price at the end of 2017, it should be clear that the value of the cryptocurrency ecosystem is generally much larger today than it was 4.5 years ago. With new innovations in smart contracts and proof-of- stake protocols, an explosion in the number of users and total value locked, and a global recognition of the cryptocurrency market, the ecosystem continues to grow despite the current price levels.
What are some catalysts for improved future price action? One could be a new use case or investment product, such as a US-based bitcoin spot ETF. Another could be regulatory certainty that would encourage institutional investors to make allocations to the crypto space. A reduced appetite for leverage in the crypto market could reduce volatility, which could attract new investors. Finally, crypto may be simply waiting for reduced uncertainty in the traditional stock and bond markets driven by Fed tightening. Once stock and bond markets stabilize and inflation returns from today’s heightened levels, the improved structure of the crypto markets may have set the foundation for the next bull market.
About the Authors
Steven McClurg, Chief Investment Officer at Valkyrie
Steven McClurg has considerable traditional finance and Fintech experience, ranging from insurtech and payments to blockchain.
Previously, Mr. McClurg was a Managing Director at Guggenheim Partners, where he was a portfolio manager and responsible for portfolio construction and strategy for fixed income and private equity. Most recently, Mr. McClurg founded Theseus Capital, a blockchain-powered asset management platform which was acquired by a merchant bank, Galaxy Digital, where he continued as Managing Director, building their asset management and public funds businesses. He also co-founded payments company, Paydrop. He also has experience in leadership roles in technology companies such as Electronic Arts and Crowdfunder. Mr. McClurg holds a Master of Science and an MBA from Pepperdine University, where he has served as an adjunct professor.
Bill Cannon, Head of Portfolio Management at Valkryie
Prior to joining Valkyrie, Bill Cannon was a Managing Director at Guggenheim Partners Investment Management, where he was member of the insurance portfolio management division responsible for $80 billion of assets under management.
Before that, Mr. Cannon worked at the Chicago Mercantile Exchange and the Chicago Board Of Options Exchange as a derivatives broker for equity index and interest rate futures and options. Mr. Cannon earned a BA in Chemistry from the University of Vermont and an MBA from the Quinlan School of Business at Loyola University Chicago.
Keith Black, Research Advisor
Keith Black is an award-winning author and course designer who specializes in making complex topics accessible to audiences of varying sophistication. He currently serves as the Managing Director of Education for RIA Channel.
Dr. Black earned a BA from Whittier College, an MBA from Carnegie Mellon University, and a PhD from the Illinois Institute of Technology. He has earned the Chartered Financial Analyst (CFA) designation and was a member of the inaugural class of both CAIA and FDP Charterholders.
Works Cited
Kauflin, Jeff (October 29, 2018) “Where Did the Money Go? Inside the Big Crypto ICOs of 2017” Forbes. Retrieved July 29, 2022
Peterson, Timothy F., (Q2 2018) “Metcalfe’s Law as a Model for Bitcoin’s Value,” Alternative Investment Analyst Review, Q2 2018. Retrieved July 29, 2022
Trajcevski, Milko (December 31, 2021) “DeFi Surges by 1,200% in 2021, $240 billion Total Value Locked in DeFi” Daily Coin. Retrieved July 29, 2022
Disclosures
Past performance is not indicative of future results. Investments may be speculative, illiquid and there is a risk of total loss. There is no guarantee that any specific outcome will be achieved.
Financial numbers may be estimated, unaudited and subject to change.
This is not an offer to buy or sell securities. Any offering can only be made by way of prospectus where risks and disclaimers are disclosed. Past performance is not indicative of future results. Investments may be speculative, illiquid and there is a risk of total loss. There is no guarantee that any specific outcome will be achieved. Valkyrie Investments is not offering tax, legal or financial advice. Please see your own professional for such guidance. Information is general in nature and may not be applicable to any specific situation or time.
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