Crypto websites are full of articles using phrase “Crypto winter”. Meaning is clear: users of the phrase imply that cryptocurrencies will go up in price again, even higher and higher, to the moon! Proponents of “crypto winter” idea use bitcoin price movements in 2013-2017 as an example of market reaching a high, falling and then reaching a new even higher price.
Why they are wrong?
Let’s start with understanding causes of the previous growth periods. And then we will analyze if causes of previous growth still exist today.
Most of the demand and supply of bitcoin is purely speculative, people buy and sell to invest. When demand is higher than supply – price goes up, and vice versa, that is basic economic principles.
From the date of creation of bitcoin and up till the end of 2017 knowledge of bitcoin was spreading wider and wider. More and more people were exposed to the information about bitcoin, and some were becoming new investors into bitcoin. So as more and more people were learning about bitcoin – more and more new buyers were entering market. Demand for bitcoin was increasing due to the demand from new buyers, and supply was the same – so price had to go up. The rise in price was fueled by the new money from new buyers. Plus “older” investors were throwing more money in as the bitcoin price was rapidly increasing.
Then hype around bitcoin reached so high that crypto appeared in all major news, from CNN to Bloomberg. Almost every newspaper and blog wrote about crypto. Even YouTube was full of crypto “experts” telling about bitcoin. So in autumn 2017 knowledge of bitcoin as an investment reached the whole world. 100% of people with access to the internet knew about bitcoin, about its rapid rise in price and vast riches made by investors.
And by the end of 2017 everyone who could potentially get interested in investment in bitcoin – did invest. Some bought bitcoin in 2012, some in 2013, some in 2016, many more in September 2017, even more in October 2017… And remember that all those new buyers were driving the price up due to the demand higher than supply.
And by the beginning of 2018 the world ran out of new bitcoin investors! There is no sense to spread the word about bitcoin anymore – everyone already knows about it. And everyone who might become a buyer – already became one. There was such a rapid rise in bitcoin price in 2017 and so much hype around. If someone had not bought then, and had not bought at a reduced price in 2018 – then in all likelihood he will never buy bitcoin. Those who thought of bitcoin as a good investment have already invested close to maximum amounts they are ready to invest.
So we have at the moment on the demand side: no new buyers, and limited buying from current owners of bitcoin, many of whom already spent all their savings on bitcoin in 2017 plus what was left in 2018.
On the supply side: 90%+ of current bitcoin owners have one desire – TO SELL. Yes, they want to sell at a higher price than they have bought. But still they want to sell. And it is a market, not a fairy-tale.
The demand is low and with no prospects of raising, ever. And supply is high. That is the difference between 2014 and 2018. Back in 2014 there were lots of people who were unaware about bitcoin, there were lots of new buyers that could buy and drive the price up. Now there are no new buyers, and nowhere to get them.
One can compare the situation to the fire. Some of the wood burned in 2013, then rate of burn decreased, and then there was a massive fire in 2017 that has consumed everything that can burn. There is no possibility of new fire anytime soon since there are no combustible materials left!
Virtually no new buyers, most buying done by existing buyers and all holders of bitcoin wishing to sell… where it might lead? With supply higher than demand there is only one major direction for the price – down.
So it is not a “crypto winter” with more new buyers to come, and ever-higher prices. One year ago there was a “Crypto Peak”, and currently we are on the “Crypto downhill”. In all likelihood the prices of crypto will never again reach levels of December 2017.
The main reason how bitcoin peak of 2017 was different from previous high of 2013: this time the world ran out of new buyers. Firestorm ran out of wood.