Now that CME Group is bringing Bitcoin futures to Wall Street, many early adopters are incredibly excited to see the world's most famous cryptocurrency go mainstream. This is the moment where they finally get to prove the skeptics wrong. Many believe mainstream adoption of Bitcoin will mean an end to insane price volatility. Prices will go up and stay up, or so the theory goes.
True believers saw Bitcoin's price fall from over $1000 to less than $200 just a few years ago.
At the start of 2017, one Bitcoin was worth just over $1000. Throughout the year, Bitcoin's value skyrocketed through a series of all-time highs, bringing it ever-closer to many early adopters' $10,000 dream price. Each setback has been followed by another surge in value. As more investors pile in, it seems that Bitcoin has yet to reach its true peak.
Bringing Bitcoin to Wall Street probably means a lot of big money investors and hedge funds throwing their financial might behind cryptocurrency. It's true that this will probably propel the price of Bitcoin to highs that were unimaginable a few short years ago, but it's equally likely that the next big crash will make previous dips seem incredibly mild by comparison.
Learning from History
In 1982, CME Group brought a new asset to Wall Street. For the first time, investors were able to trade S&P 500 futures. Futures allow investors to bet for and against an asset's future worth. Allowing futures to be traded on the S&P 500 prompted an incredible five-year bull run that sent the stock market through a series of all-time highs. Then the crash happened.
On October 19, 1987, stock markets around the world started falling. The panic began in Hong Kong and quickly spread to the rest of the world, sending stock markets tumbling by 22% over the next three days. Panic prompted more panic. Stock market valuations hit lows unimaginable a few days earlier. The five-year bull run had come to a spectacular end.
The underlying conditions for the five-year bull run that followed the introduction of S&P 500 futures are similar to those that surround CME Group's introduction of Bitcoin futures. There are also a few differences that mean a Bitcoin Wall Street crash could be even more catastrophic.
Why Did the 1987 Crash Happen? And Could it Happen Again With Bitcoin?
To understand the cause of the 1987 global stock market crash, it's necessary to understand what caused the five-year bull run that preceded it.
The S&P 500 was an incredibly attractive asset that had never been leveraged on the stock market before. When fresh assets enter the market, there is much more incentive to buy than to sell. If investors haven't bought an asset, it's impossible for them to sell it. Even those who are shorting an asset rely on the asset being supplied by previous buyers.
This creates a situation where it's easy for an asset's price to rise and very difficult for it to fall. For a market to reach maturity requires many years of investors buying and selling an asset so that it reaches stability.
The introduction of S&P 500 Futures in 1982 led to five years of rising prices before the market conditions were ripe for the panic-selling and price-collapse that happened on Black Monday in 1987. There are plenty of reasons to think that the rise and fall of Bitcoin futures could be much faster.
While its Bitcoin's record valuations that usually grab headlines, anyone with skin in the game knows that every all-time high is followed by an almost immediate fall. The value of Bitcoin seems to surge new highs, fall back sharply, then stabilize for a short time before surging on to a new all-time high.
This pattern has only really emerged since the summer of 2017 when the hype and speculation surrounding Bitcoin went into overdrive. Bitcoin's rise in 2017 has been truly incredible. It's hard to think of another asset that has seen such a spectacular period of growth in its valuation.
Bitcoin's accelerated rise may continue once cryptocurrency futures begin trading on Wall Street. In that case, the accumulated transactions that were necessary for Black Monday to happen could take much less than five years for Bitcoin.
The rise could last for a few years. It might even be over in months. But while it's impossible to predict exactly how Bitcoin's valuation will change in the future, it seems very likely that it will follow a similar pattern to S&P 500 futures: a spectacular bull run followed by a historic crash.
Bitcoin's rise has already seen frequent corrections that would prompt mass sell-offs of most over assets. Short-term dips of as much as 40% are common. Once Wall Street's big money investors and automated sell-offs get in on the game, a fall of more than 60% could be possible.
Automated selling has become a much bigger part of the market in the 30 years since Black Monday. Once automated sell-offs at particular prices are triggered, Bitcoin could easily be at the center of one of the most spectacular market crashes in history.
Surviving the Apocalypse
The most obvious way to maximize returns and minimize losses is to buy at the bottom and sell at the top. The problem is that it's impossible to predict where the top is for Bitcoin. The once-crazy dream of $10,000 Bitcoin is almost a certainty at this point. $20,000 is often mentioned as the next stop. The most optimistic Bitcoin enthusiasts believe that it will eventually have the same market cap as gold, making a single Bitcoin worth hundreds of thousands of dollars.
Turning again to Black Monday, nothing since has come close to the collapse that followed the S&P 500 futures bull run. However, the low that followed the crash didn't last long. Within 8 months, the market had fully recovered. The years that followed saw new record highs being set regularly.
It's possible that Bitcoin's collapse will be followed by a similarly swift recovery. But it's also possible that Bitcoin will prove to be similar to the forward-thinking internet stocks which collapsed in value when the dot-com bubble burst. Just as the blockchain technology underpinning Bitcoin is revolutionary, many of the ill-fated early internet firms were based on valuable innovations. However, the 1990s were too early for things like online grocery shopping to reach its true potential. The 2010s may be too early for blockchain.
CME is bringing Bitcoin to Wall Street and the value will almost certainly continue to surge in the short-term. Sooner or later, there will probably be a major correction that wipes out all of these gains. There's a very good chance that Bitcoin will recover from this and come back stronger than ever, but this cannot be guaranteed.
Is Bitcoin here to stay? Or is it just opening the door for more advanced cryptocurrencies? Whatever answer the next few years bring, Bitcoin's incredible journey is nowhere near over yet.
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