“I just want to report that I successfully traded 10,000 bitcoins for pizza.” – Laszlo Hanyecz on May 22, 2010
The past two weeks have continued our Decrypting Cryptocurrencies series by exploring the origins and key attributes of cryptocurrencies, including a detailed look at the revolutionary blockchain technology they are built upon. The meteoric rise of the “cryptos” has been one of the most fascinating phenomena we’ve seen in our careers, and we continue to watch its development with great interest on a daily basis. In this week’s Insight we’ll rewind the clock about ten years and provide a high level review on how we got to where we are today.
Two weeks ago in What Is Cryptocurrency? we talked about the October 2008 white paper that first introduced Bitcoin to the world. While the manifesto, whose author’s true identity is still unknown, unveiled the concept of Bitcoin, the actual software for the world’s first viable cryptocurrency was not released until January 2, 2009. This marked the beginning of what is referred to as “mining” – the process by which computers could be linked into Bitcoin’s distributed network and set to work running the Bitcoin software. In return for the processing power being contributed into the shared network, “miners” would be rewarded with Bitcoin. (For those interested in understanding this in greater detail, we recommend What Is Bitcoin Mining? from Digital Trends.)
The early months were relatively quiet. Mining activity was dominated by a small number of extremely early adopters. There was no price discovery in the market, no exchanges and no transactions. But this all changed in May 2010 when the first known Bitcoin transaction was executed. The transaction was initiated by a gentlemen named Laszlo Hanyecz in Jacksonville, FL when he posted on an online forum that he would pay 10,000 Bitcoin to anyone who would arrange to have two pizzas delivered to his house. A couple days later, Hanyecz was contacted by an 18-year-old student who agreed to take the other side of the trade. The order was called in to a nearby Papa John’s, and the 10,000 Bitcoin changed hands. This transaction, which was the first time a cryptocurrency had been used to purchase a good or service, resulted in a groundswell of new exposure and public interest. The price of Bitcoin promptly skyrocketed from less than a penny all the way up to 8 cents!*
Over the next couple of years Bitcoin continued to gain notoriety and worldwide recognition, triggering a slew of alternative cryptocurrencies to be developed and brought to market. Bitcoin’s price climbed to $1.00, then to $10.00, then to $100.00! In April 2013 we penned an Insight called Bitcoin: Confidence Game or Currency Revolution? in which we noted Bitcoin’s “parabolic” rise to over $200. (It’s interesting to look back on our perspectives as they existed five years ago!)
In October 2013 the crypto world faced a public affairs crisis when the FBI seized roughly 26,000 Bitcoins tied to the shutdown of an online black market dealing in illegal goods and services called Silk Road. It turns out that the “off the grid” nature of Bitcoin made it a popular form of exchange on the site, revealing one of the unintended consequences of alternative currency – its nefarious misuse by bad actors. As a result of the FBI bust, the Senate Committee on Homeland Security called for a hearing on cryptocurrencies in November 2013. While many expected the tone of the hearing to reflect a heavy-handed government response, the results were actually quite positive and served to catalyze another run up in price. Bitcoin, in fact, hit $700 for the first time in the middle of that hearing’s broadcast before sprinting quickly to $1,000 by the end of the month.
After several years of winning, 2014 ushered in a period of consolidation for the world’s top crypto. In February of that year the world’s largest Bitcoin exchange announced that it had been hacked and 744,000 Bitcoins (nearly $500 million worth at the time, $5 billion now) had been stolen from its customers. The Japanese company, called Mt. Gox, was estimated to have facilitated upwards of 70% of the world’s Bitcoin transactions up to that point. It declared bankruptcy shortly thereafter.
While the hack was a reflection of Mt. Gox’s faulty security and not a flaw in Bitcoin itself, the event understandably shook many investors’ confidence in existing cryptocurrencies and related platforms. It also threatened to “wake the sleeping” giant of government intervention. The price of Bitcoin fell by roughly 80% over the next year and half, bottoming near $200 in the fall of 2015.
The two years that followed represented the most explosive period to date for Bitcoin and the entire cryptocurrency complex. Ethereum, now the world’s second largest crypto, was launched in 2015 amidst a rising tide of global populism and anti-establishment sentiment. The following year, 2016, brought us a climax is those global trends, sweeping in such events as Brexit and election of Donald Trump as President of the United States. Cryptocurrencies, and the ideals they represented, aligned well with these global movements. Through 2017 the number of businesses accepting Bitcoin continued to increase, cryptocurrencies gained more legitimacy amongst lawmakers and regulators, and trading volumes steadily increased as more and more “investors” flooded into the space to get their piece of the action. Coinbase, an online Bitcoin exchange, even announced that it had surpassed Charles Schwab in number of customer accounts. All of this reached fever pitch levels in late 2017 as the price of Bitcoin went parabolic to nearly $20,000 before beginning its decent back down to earth, which continues to this day.
The chart below reflects the price chart of Bitcoin dating back to 2010. While the rise from $200 to $20,000 in late 2017 is quite visible, what gets lost in the graphic is that the rise from pennies to hundreds of dollars in the earlier years was just as dramatic on a percentage basis. We’re dealing with such big numbers here, charting it this way can be extremely visually deceiving. This is due to the fact, for example, that the vertical space on the chart between $2,000 and $4,000 is the exact same as the space between $10,000 and $12,000 despite the fact that one represents a 100% move and one represents a 20% move.
The chart below seems a lot more relevant to us. It plots the exact same data, but uses a logarithmic scale which gives an equal amount of vertical space to the same percentage moves along the left hand side. You’ll notice that each move upward, from 0.01 to 0.10 and from 0.10 to 1.00, etc, is a multiple of 10x. What’s interesting about plotting the data this way is how much more consistent the price rise has been over the past nearly eight years when viewed in a “percentage gain” context.
The brief history laid out above only scratches the surface of what has transpired in the crypto world over the past decade. For most investors that have gotten involved only small amounts of money are being created and lost. For others who have been more aggressive, financial dreams are coming to fruition or disappearing into thin air on a daily basis. The journey thus far has been truly mind blowing, and we might still be in the early innings of this cryptocurrency revolution. But there are still many important questions hanging in the balance that have yet to be addressed. Next week we’ll tackle some of the most important “Crypto Questions” as we see them, and draw some (very) soft conclusions about the state of the market and where we think this whole thing might be heading. Stay tuned…
*Those 10,000 Bitcoin would be worth roughly $70,000,000 at today’s exchange rate! Unfortunately that 18-year-old kid reportedly spent the Bitcoin shortly after acquiring them.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.