Is Bitcoin close to bankruptcy?

The crashing events that Bitcoin is experiencing (BTC) suggest some sort of failure in the making. 

A few days ago, on Wednesday 9 November, Bitcoin’s price hit a new annual low below $15,500. This is 77.5% lower than the high recorded a year earlier, which was $69,000 on 10 November 2021. 

Can such a loss in just 12 months be considered a symptom that the Bitcoin project is failing? 

Not really, because even worse has happened in the past. 

Is Bitcoin crashing something new?

In mid-December 2017, the price of Bitcoin skyrocketed to $20,000, setting what was then a new all-time high. 

That price was the result of a truly large speculative bubble that had begun to form in December of the previous year, taking the price from $1,100 to $20,000 in less than twelve months. 

The following year this bubble burst, and the price of Bitcoin by December 2018 had fallen to $3,200. The loss from the previous all-time high was 85% in about twelve months. 

Even though during the following year, in 2019, the price went back up, it was not until late 2020 that it returned to $20,000. 

So a -85% in the post-bubble year was not enough to bankrupt the Bitcoin project, but it took three years to return to the highs touched at the peak of the bubble. 

The 77.5% collapse recorded from 10 November 2021 to 9 November 2022 closely resembles that of 2018, if only for the almost identical duration. It also occurred at price levels three and a half times higher, so all the more reason it cannot be considered a sign of failure. 

Is Bitcoin: closer to a rise or will it keep crashing?

It is important not to assume that the collapse is over. 

Its duration might also suggest that it might be over, however, the fact that it stopped “only” at -77.5% while the one in 2018 came in at -85%, may hint at a possible continuation. 

Indeed, something similar had already happened in 2014, after the huge speculative bubble of 2013 that took the price from $13 to $1,100. 

In that case, the collapse lasted fourteen months, from November 2013 to January 2015, and always ended with -85% from previous highs. 

These data suggest that the current 2022 slump could also continue, for a few weeks or months, and perhaps end at $11,500, or -85% from the previous all-time high in November 2021. 

However, already 2021 was different from 2017, and 2013, so 2022 could also be different from 2022 and 2014. 

It should be remembered that this apparent four-year cycle follows Bitcoin’s halving cycle, which occurs precisely once every four years or so. 

A similar collapse in May

However, there is also another element that seems to support the hypothesis of the end of the collapse. 

From Saturday 5 November to Wednesday 9 November, the price of BTC collapsed from $21,000 to $15,500. In other words, it lost 26% in the space of four days, due to the failure of FTX. 

Something similar had happened in May, with the implosion of the Terra ecosystem. 

Between 5 and 12 May there was a 25% collapse that lasted an entire week. Over the next three weeks, after making a small rebound, the price lateralized. 

There was then another 39% collapse from June 9 to June 19, due to the bankruptcy of Celsius, Voyager and 3AC. 

The collapse in early November is reminiscent of the one in mid-May, and at this point, it may even appear to be over. Whether or not there will be another one remains to be seen. 

The June collapse was unexpected. The May and November ones were as well, but for different reasons. 

The one in May involved a high-risk decentralized platform. Even though it was colossal, it was well-known that it was a high-risk ecosystem. 

In contrast, the June one involved a regulated centralized platform that seemed to many to be robust and low-risk. Even though Celsius’ failure was a direct result of Terra’s implosion, it still turned out to be totally unexpected. 

The same can be said for the failure of FTX, which came totally unexpectedly. Now, however, somewhat everyone expects some knock-on failures, so much so that should they occur they would be anything but unforeseen. 

In other words, it is possible that with the collapse of these days the market has already priced in the risk of more runaway failures. It is only if there were unexpected, or huge ones, that investors might again become so frightened as to generate another painful collapse. 

Long-term predictions

In the crypto markets, such rapid and painful events should by no means be considered an exception. 

And given that over the long term the macro-trend in crypto markets actually continues to be substantially positive, it would be incorrect to regard such collapses as symptoms of imminent failure. 

By contrast, a similar mistake was made both in 2018 and especially in 2014/2015, when many people gave Bitcoin away as doomed. 

If in the long run Bitcoin has survived collapses like the one in 2014/2015, when the price fell from $1,100 to $170, it is hard to imagine that it will not survive the collapse from $69,000 to $15,500 in 2022. 

The graph of Bitcoin’s price over the long term, especially when observed on a logarithmic scale, gives a good idea of how there are cycles formed by speculative bubbles followed by bear markets, whose end result, however, is a sharply rising macro-trend. 

This reasoning may not hold up only in the event that in this bear market the price of Bitcoin collapses by more than 85% from previous highs, that is, if it falls below $11,000. In that case, the comparison with past cycles would be exhausted, and we would enter uncharted territory that could also lead to far more serious problems than the current ones.