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A short visual history of Bitcoin bubbles

A visual history of Bitcoin bubbles

The original concept paper behind Bitcoins, a decentralized electronic cash system using peer-to-peer networking to enable payments between individual parties was presented in 2008 by Satoshi Nakamoto in “Bitcoin: A peer to peer electronic cash system”.

Bitcoin-ShortHistory

 

The concept of a crypto currency is not new. Within the science fiction and fantasy world, Neal Stephenson is one author who has been speaking about alternate currencies, digital cash, free republics and the hacker geek persona.  The Great Simolean Caper published in 1995 revolves around a new digital currency hacked and counter hacked by the government, the original algorithm inventor and a group of free radicals.  Cryptonomicon in 1999 uses multiple timelines  that crisscross history leading to an independent data haven in South Asia that plans to house a new digital currency based on a German/Japanese hoard of gold stashed in the Philippines during the second world war.  The most recent, Reamde follows a band of global misfits through their whirlwind ride alternating between the real world and the complex world of monetization within massively parallel multiplayer games.  Chaos erupts when the paths of a retired drug smuggler / game developer cross those of the borderline autistic boyfriend of his adopted niece trading stolen credit card numbers with the Russian mafia who gets shafted by a group of Chinese hackers, their extended family and their attempts to increase their hoard of digital cash.

The books have a common theme. Rogue elements and icons that give the finger to authority, the desire to be truly free of the clutches of the state, the joys of complete anonymity, cryptography and the one tool required to achieve all of the above – untraceable, secure digital electronic cash.

It is the one thing hackers across ages, breeds and generations have always wanted. Not because they have gone over the dark side but because it represents the first requirement to be completely free of connections that can be used to trace you in both the real and the digital world.

Satoshi’s paper and the subsequent activation and establishment of the Bitcoin network is a realization of a long awaited dream. The original paper discusses the mechanism of generating Bitcoins (mining, proof of work), keeping generation nodes honest (chaining blocks of effort) and the role of the network in securing itself against malicious attack.

How does the Bitcoin mining process works, see the original infographic at how Bitcoin works

bitcoin-infographic_5029189c9cbaf_w1500

A short history of Bitcoin prices

Bitcoin price series-1

From Day Zero to the first price rise and correction

Other than the original price series data, the dataset used in this article was downloaded from Quandl, a brilliant free resources for data geeks.

BitcoinEventTimeline-1

On 3rd January 2009, block ‘0’ of Bitcoin network became operational. The block works as a method of reporting transactions, with each block reporting from a single transaction to over a thousand transactions. Use of Bitcoin requires a ‘Bitcoin wallet’ and (atleast one) ‘Bitcoin address’. The Bitcoin address is similar to an electronic bank account yet anonymous and not like a bank account.

The market price of Bitcoin expressed in US$ terms today is US$ 378. There are 13,375,275 Bitcoins in circulation worth 5.055 billion US$. There are 212,999 Bitcoin users (unique addresses). Since Bitcoin’s inception in 2009, there have been 48,749,408 successful Bitcoin transactions. On a daily basis across the world 84,000 Bitcoin transactions occur every day.

Bitcoins high low

Impressive as these numbers are, the beginning of Bitcoins was fairly humble. While the first Bitcoin price was available on 3rd Jan 2009, it took 2 years for the  price to break the 1 USD barrier.  On 9th February 2011, Bitcoin prices closed at USD 1.09 for the first time.

A visual history of Bitcoin price cycles

Bitcoin prices vary slightly across exchanges. Not enough to create profitable arbitrage opportunities. Rather than take a weighted average of price we use prices from CoinDesk BPI for the purpose of this note.  Prices have witnessed a great deal of volatility with the all time high occurring within the last 52 weeks. The most recent low has been a US$ equivalent exchange rate of 319.64

Bitcoinvolatility-2

Recent price volatility though has been lower than historical levels. As prices have fallen, surprisingly price volatility has also been on the decline.

Bitcoinpricevolatility

Trailing volatility calculated over the last 4 weeks and the last 3 months are both lower than the numbers witnessed in the full year.

To understand Bitcoin price volatility you have to understand Bitcoin price cycles and bubbles. To date there have been three major pricing cycles

Bitcoin-2011-crash

The first significant price rise and subsequent decline in Bitcoin prices occurred between April and October 2011.  From the 9th February price of USD 1.09 Bitcoin prices rose  all the way upto USD 30 and then dramatically fell and settle around US$ 2.

The second crash occurred in 2013.  The dates were January 2013 to April 2013. Prices rose to $230 per Bitcoin from 13.51 and then dropped below US$ 100 by July 2013.

Bitcoin-2013-crash

But in terms of volatility and ups and down, 2014 was the most interesting year in the short life of Bitcoins.  From Mt. Gox to the FBI, from Zynga to the Chinese government, Bitcoin really became the talk of the town as prices rose to historical highs and then collapsed.

BitcoinEventTimeline-2

Here is the 2014 price series with its many highs and lows.

Bitcoin-2014-crash

Bitcoin exchanges

Bitcoin exchanges are used in exchanging a real world (fiat) currency into Bitcoin and vice versa. The exchanges used ‘hot wallets’ and ‘cold storage’. Hot wallet contain Bitcoins available for sale at the exchange. When the hot wallet is exhausted cold storage is used to refurbish the supply of Bitcoins. Such measures ensure that even in case of a theft only a fraction of the total Bitcoin storage is at risk.

At the exchanges Bitcoins are traded like any other asset. There are at least 71 exchanges that deal in Bitcoins. Here is a complete list of Bitcoin exchanges.  The five major exchanges within this list are

  1. CoinDesk BPI
  2. Bitstamp
  3. Bitfinex
  4. BTC-e
  5. LakeBTC

Bitcoin resources, references, bibliogrpahy

  1. http://moneymorning.com/tag/Bitcoin-price/
  2. http://www.coindesk.com/
  3. http://eprint.iacr.org/2012/584.pdf
  4. http://www.newyorker.com/tech/elements/the-Bitcoin-boom
  5. http://blogs.wsj.com/briefly/2014/02/25/5-things-about-mt-goxs-crisis/
  6. http://planetbtc.com/complete-list-of-Bitcoin-exchanges/
  7. https://www.cryptocoinsnews.com/
  8. http://Bitcoinvox.com/article/1062/asset-allocation-explains-Bitcoin-price-movements
  9. http://Bitcoinvox.com/article/1084/us-politicians-to-receive-Bitcoins
  10. http://gizmodo.com/how-to-trade-Bitcoin-and-if-you-should-1484488823
  11. http://www.forbes.com/sites/jessecolombo/2013/12/19/Bitcoin-may-be-following-this-classic-bubble-stages-chart/
  12. http://gizmodo.com/a-tv-anchor-tries-to-gift-Bitcoin-on-air-is-immediatel-1488636715
  13. https://www.cryptocoinsnews.com/Bitcoin-price-moon/
  14. http://bitcorati.com/2013/11/13/10-reasons-why-the-value-of-Bitcoin-is-skyrocketing/
  15. http://money.cnn.com/2013/03/28/investing/Bitcoin-cyprus/
  16. http://www.usacryptocoins.com/thecryptocurrencytimes/uncategorized/the-past-and-future-of-Bitcoins-price/
  17. www.csmonitor.com/World/Security-Watch/Backchannels/2013/1004/A-Silk-Road-to-total-freedom
  18. http://finance.yahoo.com/blogs/the-exchange/Bitcoin-validity-price-gets-big-boost-baidu-160640862.html
  19. http://www.forbes.com/sites/katevinton/2014/10/08/feds-say-that-even-if-the-fbi-hacked-silk-road-ulbrichts-rights-werent-violated/
  20. http://www.forbes.com/sites/jonmatonis/2013/05/13/6-new-Bitcoin-educational-resources/
  21. http://investorplace.com/2013/12/baidu-bidu-Bitcoin-value/#.VDZpwVdHvc9
  22. http://www.bloomberg.com/news/2013-12-05/china-s-pboc-bans-financial-companies-from-Bitcoin-transactions.html
  23. http://www.bloomberg.com/news/2014-02-07/Bitcoin-price-falls-as-mt-gox-exchange-halts-activity.html
  24. https://web.archive.org/web/20140210122955/https://www.mtgox.com/press_release_20140210.html
  25. http://www.pokerupdate.com/news/business-and-finance/mt-gox-shutdown-puts-Bitcoin-investors-on-edge/
  26. http://moneymorning.com/2014/04/28/why-the-Bitcoin-price-is-falling-today-2/
  27. http://moneymorning.com/2014/08/19/why-the-Bitcoin-price-is-falling-and-why-its-not-a-crisis/
  28. https://Bitcoin.org/Bitcoin.pdf
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