Will Bitcoin’s Rally End In A Crash As It Did in 2017?

Apr 15, 2021

Four years ago, Bitcoin saw a colossal surge in demand and its value reached an all-time high, shocking both followers and skeptics.

But back then, its record-breaking high was followed by a crash. Bitcoin has now reached new heights and is worth around three times as much as it was then. Could there be another crash around the corner?

Bitcoin in 2017

In December 2017, Bitcoin climbed to nearly $20,000 after starting the year at less than $ 1,000; the increase was over 1,900%. A year later, in December 2018, Bitcoin’s price was around $3,000 – the strong rally was followed by a  steep fall.

At the moment, Bitcoin is thriving. From December 2019 to December 2020, the popular cryptocurrency increased by 300%. It went from just over $7,000 to around $29,000. Bitcoin surpassed its 2017 high last year; its rally continued in 2021, reaching a new record of over $60,000.

Now that Bitcoin and altcoins are skyrocketing, could there be another crash like in 2017?

What Could Kill Bitcoin’s Price?

Ulrik Lykke, managing director of crypto-focused hedge fund ARK36, suggested that history teaches investors not to be overly greedy.

“If the market goes completely parabolic and the price hits $ 100,000 to $ 300,000 per coin, a big downturn similar to 2018 is likely to follow,” he said in a recent meeting. “The lesson here is to know how to take profit when the price gets so high that a sale can radically change your life. In other words, if absolutely everyone, including your grandmother, is optimistic about Bitcoin, then it is probably a good time to start selling some of it. ESG trend and China could cause problems for Bitcoin.”

China V.S BTC

China was never too fond of Bitcoin. China changing its legislation regarding crypto could further influence the decline of Bitcoin. Shortly before Bitcoin’s crash in 2017, ICOs (Initial Coin Offerings) were banned in China. In addition to this, at the beginning of 2018, China altered its policies for mining Bitcoin – suddenly, mining companies had different electricity prices, taxes, etc. Despite China’s aims to abolish the Bitcoin industry, the cryptocurrency’s supporters learned to bypass the regulations by trading BTC/USDT. 

Although the state still tolerates Bitcoin mining, the government has already banned trading. Bitcoin trading in China does not happen against the fiat USD, but against USDT.

Regardless, China is still trying to undermine Bitcoin. It has been known for some time that the Chinese central bank is working on its own cryptocurrency, a so-called Central Bank Digital Currency (CBDC); a.k.a the digital yuan.

“If any issues arise that could affect the willingness or ability of both domestic and foreign investors to use USDT, the most likely result would be a severe liquidity shock to the broader cryptocurrency market, which could be amplified by its disproportionate impact on HFT [high-frequency trading]-style market makers which dominate the flow,” analysts at JPMorgan mentioned in an 86-page report on the cryptocurrency.

With China’s recent moves to cancel major IPOs, restrict digital payments, and other more stringent financial regulations, Bitcoin could be losing a very important market.

An Issue with Sustainability 

ESG (Environmental Social Governance) is definitely something that could hurt Bitcoin’s value. According to a recent survey by the London School of Economics, 96% of all major global companies are expected to increase their prioritization of environmental, social, and governance issues in 2021.

According to the Bitcoin Energy Consumption Index, Bitcoin’s carbon footprint is 25% higher than that of the Czech Republic. Mining Bitcoin consumes about the same amount of electricity as the entire Philippines does annually.

 The mining of cryptocurrencies can violate these principles and therefore stand contrary to the current trend in ESG investing. Neglecting these environmental issues could jeopardize institutional support for cryptocurrencies and slow down the bull run.

Differences from 2017

Nevertheless, today’s situation is different from 2017. Above all, what has changed is that more institutional investors are now investing in Bitcoin. JPMorgan, for example, believes that 22% percent of institutional investors who have not yet invested in cryptocurrencies will most likely do so in the future. 

The Wall Street firm has recommended the cryptocurrency as a hedging tool against volatility from other assets.

“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio,” strategists have suggested in a recent report

The analysts did add that while cryptocurrencies are useful, they do have their limitations.

“Cryptocurrencies are investment vehicles and not funding currencies,” the strategists said. “So when looking to hedge a macro event with a currency, we recommend a hedge through funding currencies like the yen or U.S. dollar instead.”