From exchanging BMW’s for mining rigs to reselling them on the Internet: how the cryptocurrency boom turned out a year later.
The history of ups and downs of crypto assets in 2017–2018
On November 27, 2018, the bitcoin exchange rate dropped to a record low for the year — $3,700. However, just one year prior, in December 2017, the cryptocurrency was peaking at a new maximum almost every week while experts predicted the price to rise to $50k–100k the following year.
At that time, the hype around cryptocurrency reached its pinnacle: people, who were far removed from IT and finance took loans and sold valuable property just to buy bitcoins early and earn money on their growth, while many others decided to massively purchase graphics cards and join “farmers” to mine Ethereum (ETH) and other altcoins.
Spring-Summer 2017: cryptocurrencies receive widespread recognition
- On May 21 the Bitcoin (BTC) exchange rate surpassed $2000; on June 12 it topped $3000.
- On May 31 Mozilla founder Brandon Ike held an Initial Coin Offering (ICO) for the Brave browser and raised $35 million in 24 seconds.
- On June 13, the ETH exchange rate reached $400 while the growth rate was more than 2000% compared to March.
By mid 2017, cryptocurrencies left the boundaries of the the IT community, attracting all kinds of consumers and even found itself on television.
Occasionally, TV presenters described BTC as “the most profitable investment” and “more profitable than gold, oil, and a great deal of securities.”
Having learned that cryptocurrency can be mined independently and on one’s own, many started to create mining farms: some managed to purchase 200–600 graphics cards at a time.
This caused a massive graphics cards shortage making them almost disappear from inventories and store shelves when, meanwhile, retailers increased prices for cards by 50–60%.
However, by that time, the competition in Bitcoin mining had grown so substantially that it became unprofitable to use graphics cards for calculations, so crypto-enthusiasts began to use miners based on ASIC (application-specific integrated circuit) chips.
For example, the computing power (hash per second) of a six Radeon RX 560 graphics cards farm is 60–72 Mx / s (megahashes per second), while one Bitmain L3 ASIC miner is 504 Mx / s.
The ICO market was booming. After the TenX Singaporean fintech project successfully raised $81 million (or 245,000 ethers) in less than five minutes, many entrepreneurs rushed to the new opportunities and try their luck at ICO.
At the same time, the first consulting companies began to appear, offering turnkey ICO services: developing economic models for projects, holding marketing campaigns, and bringing the new altcoins to the crypto exchanges.
Fall-Winter 2017: the hype
- On October 13, the Bitcoin exchange rate jumped by almost 20% to $5800 and continued to grow.
- On November 28, the Bitcoin rate surpassed $10,000, on December 7 $15,000, and on December 17 it reached its historic maximum of $20,042.
- On December 11, the Chicago Board Options Exchange began trading in Bitcoin futures.
In the fall of 2017, bitcoin and other cryptocurrency rates increased dramatically, and with them the popularity of mining rose as well. The ASIC miner market was flourishing.
And buyers were ready to pay more: due to the apparent growth of cryptocurrency rates in the long term it seemed easy to make profit regardless of the markets’ overall outcome.
Those who presumably had less budget tended to trade cars, apartments, and other expensive property for mining hardware. Many took loans, borrowing money to buy ICO tokens and altcoins. Due to such activities, this market was growing like a new financial pyramid: the newcomers poured money into the market and the early investors enjoyed the profits, while the most recent investors simply served to inflate the price. Moreover, since money or other tradable assets do not have a fixed implicit value — they are worth exactly as much as people are willing to pay for them — the increasing demand caused prices to decouple from a “gold standard” and valuations became overly optimistic.
Many who bought miners or tokens in November-December 2017 in the hope of earning large sums have so far gained nothing.
The rapid growth of the Bitcoin exchange rate in December 2017 left public opinion divided. Every time the cryptocurrency price reached another milestone, many expressed regret of not having acquired it earlier. Others suggested that the mark of $20,000 is far from the ceiling, expecting Bitcoin to grow by the end of 2017 to at least $23,000 and even further to $33,000.
Numerous cryptanalysts predicted that the price for a Bitcoin would rise to $90,000 by March-April of 2018. Experts, who predicted Bitcoin’s value would multiply in 2018 up to $100,000, were also contributing to the escalating excitement around cryptocurrencies. On the other hand, contrarian opinions suggesting that Bitcoin could rise first and then fall to $ 1,000 were unpopular and often ignored.
Winter-spring 2018: the market collapses
- On January 17, 2018, the bitcoin rate dropped to $ 9,800, and on February 6, to $ 6,100. In March the exchange rate briefly doubled its February lows at $ 11,800.
- According to reports of consulting company Ernst & Young, ICOs helped projects to raise $4 billion. More than 50% of projects found it difficult to name the launch dates of the products for which they raised money.
- While in June 2017, 93% of projects were able to raise the required funds during the ICO, by November 2017 the share of such projects fell to 23%.
According to E & Y, by October 2018, 90% of tokens of all ICOs conducted in 2017 were trading below their starting price point. Additionally, more than 70% of the projects still have not submitted a product or a working MVP.
The demand for mining equipment sank along with the BTC and ETH exchange rates, forcing hardware sellers to drop prices, leaving them in a difficult situation. In January 2018, it became apparent that devices, which had cost $5,000 a month prior, could not be sold for more than $4,000. While still receiving funds from investors in the hope of future growth, hardware retailers continued to buy more equipment and to fall into the market declines.
At that time, the ICO market was not yet as dead as it is now: you could still manage to invest $30k in marketing and still get $100k by selling tokens. But by the spring of 2018, the ICO market had already begun to collapse. Several factors contributed to the downfall. The first factor was the ban of ICO and cryptocurrency advertising by large advertising platforms in early 2018. The first to impose the ban was Facebook, then Google followed suit. This led to a drastic traffic drop on all websites with a strong decline of marketing campaigns and their effectiveness.
The second factor was the massive growth of distrust. In February 2018, Bitcoin.com had conducted a study, stating that more than 60% of projects that raised money with an ICO in 2017 were “dead”. In total, the company investigated 902 projects, many of which either stole the raised funds or ceased operations and development. According to experts, 46% of “dead” startups had raised about $104 million.
The market quickly inflated and after a moment it collapsed — and it continues to cool down to this day. The enthusiasts, who invested in the first ICOs and repeatedly invested their multiplied money in the next ICOs, mainly just lost their money.
Furthermore, founders of crypto projects with successful ICOs also lost money as a result. After selling tokens for BTC and ETH, many have left cryptocurrency in their wallets to depreciate in the coming months.
In January 2018, 20,000 ETH could be purchased for $28 million. In April, for $8 million. Naturally, entrepreneurs had to adjust product development plans and cut expenses. Those who intuitively guessed correctly and transferred the raised cryptocurrency to fiat money at the peak rate managed to win. But those were only the few.
Autumn 2018: the bitcoin rate dropped again
On November 27, the Bitcoin exchange rate fell to the level of August 2017 and amounted to $3,700 while the ETH rate was under $100, 1/14 of its January 2018 rate. There could be two reasons for this.
Firstly, the ICO-projects that earlier were raising ETH or BTC but decided to exchange cryptocurrency for fiat funds placed downward pressure on the exchange rates as they pulled money out of cryptocurrency. This assumption can be backed by the fact that ethereum began to go down before the whole market started to crumble. Many ICOs had long positions on ethereum.
Secondly, the downfall could be caused by investors who might have lost patience and decided to withdraw assets to fiat funds after a new decline, leading to a typical pattern of a crisis market situation: when people come out of an asset, it becomes cheaper, making others follow suit as they observe the sharpening of the price decline. The mass exit is an attempt to save at least some capital.
Due to the ETH collapse, “home-brewed” miners, who were buying graphics cards in 2017 at the peak of mining excitement, started to panic, which made them put their farms up for sale. Today, due to the exchange rates, mining can be beneficial only if a miner has access to cheap electricity and large computing power.
- In the case of a cryptocurrency exchange rate sag, miners do often disconnect from the system due to low profitability. This causes the calculation complexity and inter-miner competition to decrease, thus the remaining participants receive more coins.
- As the exchange rate and profitability of cryptocurrency mining grows, new miners connect to the system, thus the average bounty per participant decreases.
This is one of the main features of blockchain and the creators of Proof of Work — such a system has a large margin of persistence due to its ability to self-balance.
Circumspect forecasts: what will happen to the market
Right now the blockchain market is slowly reforming itself and turning towards the business of whether blockchain is feasible for the particular project, how or why blockchain applies, and creating smart contracts or connecting blockchain to existing information systems. There is also ongoing development of software for the cryptocurrency industry predicated on genuine business needs. These are all indicators of substantive work rather than hype to raise money based on visually-appealing presentations or ambitious white papers.
It is most likely that the cryptocurrency market will experience a new leap, as it is affected by cycles like the gold or securities markets. It follows the quintessential bubble pattern, wherein the market gets pumped up first, people rush in and buy at the highs, then, as the wave crests and prices fall, emotions drive people to sell.
Even if BTC drops to $1000, it still has a future. One possible scenario is cross-border settlements. ETH and EOS are other cryptocurrencies with strong future potential. While they are interesting from the technical standpoint of complex smart contracts developed on their own terms, the technology itself is necessary for pushing the blockchain into real business and creating countless DApps based on those businesses. The gold rush era of cryptocurrencies has come to an end. Now, cryptocurrency and blockchain technology will forge ahead and find their way to real world applications but in a smoother and more evolutionary way.
