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Bitcoin: is there a life below $20k?

Bitcoin has been steadily spoiling the mood of cryptocurrency traders and investors for several months with its fluctuations below the psychological level of $20,000 per coin. Last week it was "dancing" around the $19,000 mark, categorically refusing to resume growth. In the crypto environment, this has already led to almost panic moods as many still remember 2018, which became a year-long “Black Monday” for cryptocurrencies.

How justified is this panic? Can the current decline of Bitcoin be considered temporary problems? Or is it still a sign of the coming "death" of the oldest cryptocurrency in the world? Let's try to figure it out in the article.

Spoiler: there are serious reasons for sad predictions, but there are also ones for positive forecast.


1. The four stages of Bitcoin's evolution
2. What's now? Pros and cons of Bitcoin's stockiness
3. Conclusions


We will not calculate support levels, recommend indicators, try to interpret the readings of oscillators as we will leave all this to the masters of technical analysis. The purpose of this article is to clarify the fundamental factors and patterns that are important for understanding the medium and long-term behaviour of Bitcoin. And the key to this understanding is knowledge of the history of the development of this cryptocurrency.
If you are not interested in all this and you only want to read an analysis of the current situation, welcome to the last chapter of the article. But don't be surprised if something is unclear.

The four stages of Bitcoin's evolution

The vast majority of people perceive Bitcoin simply as an ordinary currency. Like a dollar, but digital. But if so, what allows Bitcoin to grow so rapidly relative to the currency behind which the entire trillion-dollar US economy stands? It is a simple question that clearly shows that everything is much more complicated than it seems.

Approximate stages of Bitcoin evolution are on the chart. The source of numbers is TradingView.

It's interesting that the answer to this question depends on what period we are talking about. Since 2008, when the first block of Bitcoin was generated, and to this day, four stages of the evolution of this cryptocurrency can be distinguished. And each time its behaviour changed significantly.

🧸 How it all started: a toy of tech geeks

In 2008, a programmer known as Satoshi Nakamoto brought together existing developments on cryptographic currencies (the first of them dated back to 1983), added some of his own ideas and created an integral protocol that allowed for the first time to transform a rather abstract concept into reality. This is how Bitcoin, a currency independent of banks and regulations, the issue of which is controlled not by the state, but by an algorithm, appeared.

At that time, as, in fact, now, anarchic sentiments were strong in the technological sphere, caused by dissatisfaction with the bloated and overregulated government machine, as well as with high taxes. However, who might like to give more than a third of the income to the state?

So, Bitcoin quickly gathered around itself technology enthusiasts, who are now commonly referred to as crypto-anarchists. And they began to develop the blockchain network in the belief that the cryptocurrency will be able to displace the usual one and become an independent means of payment. There was no economy behind it, but just naked enthusiasm and a bet on the future.

In this case, how to determine the price of a coin if there is no market? It's simple: Bitcoin was equated to the cost of electricity that was spent on its "production" (mining). We can say that at the first stage of evolution, Bitcoin was provided with electricity in the same way as world currencies were provided with gold before.

Mining is the process of "getting" cryptocurrency. Different mechanisms are used for this, but Bitcoin mining relies on the computing power of the devices participating in the network. In order to "get" a block of Bitcoins, many computers around the world are engaged in calculating one very difficult task. The device that solves it first will get the right to write a new block into the sequence, that is, it will "get" it. The main feature of the algorithm is its randomness. A miner can affect the probability of mining a block with his equipment in only one way which is by increasing computing power.

Although this solution had its drawbacks due to the different prices of electricity in different countries, it potentially provided all those who joined the blockchain in the early stages with a profit of hundreds and thousands of percent on the horizon of 10-15 years.

The fact is that the number of Bitcoin coins is limited to 21 million. Therefore, the cryptocurrency mining algorithm assumes regular halving.

Halving is a mechanism to fight cryptocurrency inflation. The principle is simple: every 210 thousand blocks mined, there is a twofold reduction in the reward while maintaining the energy intensity of mining. For example, from January 2009 (the launch of Bitcoin) until the first halving on November 28, 2012, the reward for the mined block was 50 coins. After halving, it decreased to 25 coins. Now it is already 6.25 BTC, and after the tenth halving in 2048, the reward will already be 0.04882813 coins per block.

The Bitcoin mining algorithm provides for 32 halvings, but the last 15-20 of them will most likely never happen due to a meagre reward that will not recoup the costs.

The same mechanism was supposed to provide an automatic increase in the value of the currency by about two times while maintaining a connection to the cost of electricity.

Approximate graph of Bitcoin halvings (calculated for the current block generation rate).

Let's explain with an example. For example, to generate a block of Bitcoins, you need to spend $500 worth of electricity. This gives a coin value of $10 (500/50) before the first halving in 2012 and $20 (500/25) after it.

In theory, everything is fine, but in practice, Bitcoin reached a price of $10 only in 2011, two years after the launch of the cryptocurrency. However, the owners of the coin had nothing to complain about  as then Bitcoin began to grow rapidly due to the arrival of a large number of miners into the network, as well as the one of people from the outside who were the first to consider the prospects of the coin.

Unfortunately, they were mostly completely marginal characters, like drug dealers, killers, hackers, extortionists. The idea of cryptocurrency appealed not only to the fighters against the big government, but also to everyone who was engaged in illegal affairs. All because of the inability to block the wallet and because of its anonymity.

The growth of Bitcoin's popularity among criminals was the end of the first and longest stage of Bitcoin's evolution. Since 2013, when Silk Road, the largest drug market in history, was closed, people started talking seriously about Bitcoin. But it took a long three years to unwind the demand spiral.

🪙 Protective digital gold asset

Nearly in 2016-2017, the first wave of hyped demand for Bitcoin came. This was largely due to the ICO boom. The new technology was then talked about everywhere, of cource, with an emphasis on its tenfold growth in less than ten years. People began to buy Bitcoin, which spurred its growth, and the price doubled almost every month. A beautiful exponent was drawn on the chart, which rushed vertically upwards, and on the Internet Bitcoin was called "digital gold", comparing it with a real precious metal in the 70s.

An example of comparing the gold chart during its rapid growth with the Bitcoin chart. Source: cointelegraph.

It is interesting that during this period, Bitcoin reacted to economic news in the same way as gold: negative news for the market led to its growth, and positive ones caused small falls. That is, people perceived cryptocurrency as a protective asset.

Perhaps this perception is caused by terminology. For example, mining is essentially extraction of minerals in mines.

This celebration of life lasted until December 2017, when the Bitcoin exchange rate at the moment exceeded 20 thousand dollars. And then everything collapsed. The reasons are still being debated, but most likely it was not because of complex constructions, but due to the desire of some fairly large coin holders to fix profits before the holidays. This pushed the overheated currency down and caused panic selling.

How the Bitcoin exchange rate changed in 2017. Source: coinmarketcap.

As a result, a year later, in December 2018, Bitcoin was worth less than 3 thousand dollars. Around the end of 2018-the beginning of 2019, the second stage of Bitcoin's evolution ended. It showed that cryptocurrency cannot be considered a resource asset, and its price is determined solely by the balance of exchange orders for its purchase and sale. That is, Bitcoin could potentially fall to almost zero, which cannot happen with, for instance, gold in the current economic system.

👣 Both the item and the currency

In March 2019, after a long crypto winter, Bitcoin began to grow again. Not as fast as before, but quickly: if in February it still cost about 3 thousand dollars, then in March the price reached 3600, in April it was up to 4600, and in May it crossed 7600. This time the price peaked in June, when the value of Bitcoin exceeded 10 thousand dollars.

It is believed that the reason for this growth was the active development of the cryptocurrency infrastructure throughout 2018: gateways and exchanges were launched, new coins were created, and various services were built on the basis of the blockchain. As a result, by the beginning of 2019, Bitcoin has become a real means of payment, and not just numbers in a wallet. If in 2015-2017 its conversion into fiat money was very expensive, and it was very difficult to buy services or goods for cryptocurrency, then in 2019 the situation improved dramatically. And Bitcoin in the new reality had the status of the oldest, and therefore the most reliable of cryptocurrencies.

At the third stage of its evolution, Bitcoin has turned into a hybrid of an ordinary currency, which can be used to pay for a new laptop or for a subscription to a streaming service, and of a protective asset.

🧳 A widespread investment tool

The fourth stage is the last in the evolution of Bitcoin. Perhaps only the last one so far, and then something else is waiting for us. But we're here now.

This stage began around the middle of 2020. The coronavirus pandemic and the hard lockdown associated with it gave it a start. Many people remembered the digital gold, given the extraordinary events, and began to buy it in an attempt to save money as there was an epic collapse in the stock market at that time.

As a result, the exchange rate rose to an enormous 50 thousand dollars per coin. However, by the summer, the stock market compensated for the covid failure and began to grow by leaps and bounds, along with Bitcoin. Unfortunately, it wasn't a coincidence.

The fact is that against the background of tough lockdowns, so-called "helicopter money" began to be distributed in Western countries, especially in the EU and the USA. To each household whose income did not reach a certain level, the authorities paid an allowance to support the demand for goods and services. The government wanted people not to change the usual level of consumption and thereby helped the economy.

The idea was not a bad one, but the square-nesting execution led to the fact that millions of households received a lot of available free money. For example, in the United States, only from April 2020 to September 2021, people who lost their jobs received at least 70 thousand dollars in payments per household. And this is without taking into account various surcharges from specific cities. For comparison: the average annual salary in the United States is less than 55 thousand dollars.

Total COVID Relief: $60,000+ in Benefits to Many Unemployed Families

What legislative acts were adopted from April 1, 2020 to September 6, 2021 and the amount of payments for households that they provided. Source: taxfoundation.

Most of this money (surprise!) did not go for direct consumption, but poured into the stock exchange with a powerful flow. As a result, the stock price flew into the sky, taking Bitcoin with it.

But why did the cryptocurrency behave the same way as the stock market this time?

The fact is that the vast majority of people who brought their covid money to the market in the hope of making money were unqualified investors. Better to say, they had little idea how to select stocks for investment and how it generally works. Therefore, they invested money on a simple principle: they talk a lot about it, so it's worth it. Hence the incredible value of Tesla, whose capitalization exceeded the total capitalization of all other automakers combined and the jump of stocks of Apple, Google and other tech giants. Bitcoin also turned out to be trendy as everyone heard about blockchain and cryptocurrency then, as now, plus the NFT boom, which fueled interest.


A graph of the correlation of the Bitcoin and Ether exchange rate with the S&P500 stock index from 2016 to 2022 including. Source: @ecoinometrics.

Bitcoin has turned from just a cryptocurrency into a mass investment tool. Since the nature of capital is the same, Bitcoin's fluctuations have become more and more like stock market fluctuations. At the peak values of 2020, the correlation between Bitcoin and the American S&P500 index reached 60%. Then, after the end of coronavirus restrictions, it noticeably decreased, but soon began to grow again. Now Bitcoin is again behaving 60% the same as the mentioned stock index.

The S&P500 is a stock index that includes 505 stocks of 500 American companies with the largest capitalization. The list has been compiled annually by Standard& Poor's since March 4, 1957.

Having peaked at the end of 2021, stock indexes began to decline — first because of the fear of war, then because of its beginning. At such a time, investors prefer to "park" their money in low-risk instruments, such as US government bonds. For the same reasons, Bitcoin also began to fall (recall that it ceased to be a protective asset at the 2-3 stages of evolution). The fall was accelerated by several rounds of base rate increases by the US Federal Reserve.

So, we hope that the context is clear. Now let's talk about what all this means.

What's now? Pros and cons of Bitcoin's stockiness

Bitcoin has become more like a stock than a currency. You can, of course, argue and say that the stock is tied to the capitalization, profitability and other parameters of the company. But in practice, for popular stocks, like the mentioned Tesla or Apple, this has not been the case for a long time. If we make a classic fundamental analysis, then the cost of such securities should be ten times lower than it is now.

The price of popular modern stocks depends more on market expectations. That is, if most people in the market believe that stocks will rise in price, they will rise in price, and if they believe the opposite, then stocks become cheaper. At the same time, there are practically no restrictions on either growth or decline. The company may be unprofitable in general (take a look at Twitter), but its stocks will rise in price as much as possible, as long as buyers believe in them.

The same thing happens with Bitcoin. Moreover, there is no regulator on the crypto exchange that stops trading when the fall is too big and too fast to stop the panic in the market. So the price of Bitcoin is a pure function of the expectations of market participants without any intermediaries.

What does this mean for coin owners and traders? Let's start with the cons:

🏠 Bitcoin has neither a ceiling nor a bottom. Theoretically, although this is unlikely, it can drop to $1,000, and up to $100, and even up to $10 per coin. There are no fundamental restrictions for this.

📈 On strong incentives, Bitcoin will always have strong volatility: the coin can go back and forth by 5-10% in a day, and this is normal. You need to either get used to it, or not buy Bitcoin, so as not to get nervous. And don't trade with leverage if you want to increase your capital, not spend it.

😬 You will never know how much money you will have in your wallet, not even tomorrow, but in 10 minutes when transferring to fiat currencies. For example, you can start making a laptop purchase in a store when you have the right amount in your account, and by the time of payment you will not be able to pay due to a jump in the exchange rate.

👻 Unpleasant features, aren't they? Have you already thought about selling Bitcoin before it's too late? Take your time: everything is more positive than it seems.

Ironically, the current state of affairs, with all the disadvantages, makes Bitcoin one of the best investment tools. Of course, the portfolio should be diverse in order to reduce risks, but a certain share of the oldest cryptocurrency in it, taken for the long term, will be appropriate.

The fact is that Bitcoin does not behave exactly like a specific stock, but rather like a stock index. That's it for a banal reason: it has long become a symbol not just of the entire cryptocurrency market, but of the very idea of blockchain. Therefore, Bitcoin can be considered a reflection of the sentiments of all crypto investors, no matter what coin they invest in or what technology they support. And indexes, unlike single stocks, always win in the medium and long term.

Let's take the same S&P500, whose correlation with Bitcoin we have already demonstrated. Here is a table that shows the probability of investing in this index, depending on the duration of the investment.

S&P500: 1926-2015. Source of numbers: Returns 2.0.

In all 96 years of the S&P500's existence, there has never been a period of 20 years in which it would not show an increase. And with a ten-year investment period, the probability of increasing capital is 96%.

In the longer term, stock indexes perform even better. This was well demonstrated by Jeremy Siegel in his book «Stocks for the Long Run». There is an interesting graph (check it below) that shows how much you would have earned by investing $1 in 1800 in various inflation-adjusted assets.

The graph shows what kind of increase (adjusted for inflation) an investment of $1 in 1801 in different types of assets would give. Source: Jeremy Siegel, «Stocks for the Long Run».

A little bit about terminology: 'stocks' here is an analogue of the S&P500 index, but compiled by the author manually, since it did not exist in 1800. Despite several wars, including the large-scale War of Independence in 1812, the Civil War of 1861, the First and Second World Wars, the index, made up of stocks of the largest US companies, was still growing. And it has grown to impressive values — $12.7 million!

And now look at the Bitcoin chart. But not in the usual, but in the logarithmic scale.

​​A chart of the Bitcoin exchange rate to the US dollar with a logarithmic price scale. Source of numbers: radingview.com.

It looks, of course, more ragged, but here the size of the scale is smaller, and the asset is still not a stock-exchange one. However, the trend is obvious.


Bitcoin now and Bitcoin ten years ago can be called essentially different assets. Now Bitcoin behaves more like a stock index than like gold and other protective assets. Therefore, high volatility and strong drawdowns are normal for it.

Can the current drawdown end with the depreciation of the oldest cryptocurrency to the level of 2018?

It is quite possible. Bitcoin has no fundamental value that would limit its fall. But it has the status of the first and most popular cryptocurrency, which allows the coin to rely on the expectations of all crypto investors, and not only on the holders of BTC.

Is a new growth cycle possible?

In the medium and long term, yes, the trend is still pointing upwards, and the correlation with stock indices gives optimism. But there are no guarantees, as in the case of other investments.

This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.

Maria Kachura
Maria Kachura

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