The global economic recovery has been cast in doubt by a new strain of COVID-19. The Omicron variant rattled traditional markets and the panic spread to the crypto-sphere with bitcoin (BTC-USD) falling to a monthly low of $54,000 (£40,705) last week.
This collapse was made all the more dramatic after bitcoin had reached a record high of more than $69,000 earlier in November.
Nicholas Cawley, strategist at DailyFX told Yahoo Finance that the sharp sell-off in the cryptocurrency space was "purely a risk-off move", with both retail and institutional investors jumping to safe havens such as US Treasuries, Japanese yen and gold. This investor action manifested with gold gaining 0.6% on Friday, closing the day at $1,791.40 per ounce, up $7.30.
In cryptocurrency markets, many investors cashed out their positions with plans to buy back in at a later date when the storm settles, or if the new Omicron variant is discovered to be less potent than originally feared. Earlier this week, this sentiment materialised with a buyback lifting the bitcoin price to $58,000.
Ian Taylor, executive director at CryptoUK, described traders "taking profits and putting their allocation into cash or less volatile assets in this time of uncertainty ahead of possible additional lockdowns".
But, even before last Friday's sharp sell-off, many analysts were noting signals that the price of bitcoin, and other major cryptocurrencies, was tracing the same trajectory of late 2017 and the subsequent crash of early January 2018.
From early January 2018 to September 2018 cryptocurrencies plummeted 85%, making what has been dubbed the "Great Crypto-Crash" worse than the Dot-com bubble's 78% collapse in 2000.
According to Adam Morris and Tom De Spiegelaere, co-founders of Crypto Head, it is not a “matter of if there will be a crypto crash, it's a matter of when”.
Speaking to Yahoo Finance, the pair pointed to chart data indicating the cryptocurrency market is currently "unsustainable" and coming "towards the end of a bull run".
They added that the recent "parabolic movements" before Friday's crash reveal that a lot of people have "FOMO'd into crypto" in recent months, and they predict a "sizeable pullback" in the market.
This opinion was echoed by Panxora CEO Gavin Smith, who said the cryptocurrency market was “overextended in early 2021" and expects "lower prices for the remainder of the year and early 2022".
However, he does not expect to see "the extent of the decline we saw in 2018".
"The market will range between 60k and 40k into 2022," he told Yahoo Finance and, focusing on the price of bitcoin in particular, he predicted the world's biggest cryptocurrency will stagnate until "after April 2022, leading to new highs toward the end of next year”.
Between late 2017 and mid-2018 bitcoin collapsed by 85% in value. According to Gunnar Jaerv, COO of First Digital Trust, the 2017 bubble was created by retail investors who eventually lost their exuberance after “wide investment in unsustainable projects lacking real technological infrastructure”.
Watch: What is bitcoin?
Now the cryptocurrency market is more mature and less volatile, Jaery said. The increased demand and adoption by retail investors is backed by “millions of dollars of investment from major players and institutions who recognise blockchain technology and crypto is here to stay”.
There has been a significant improvement in bitcoin’s liquidity since the Great Crypto-Crash. After the bitcoin price collapsed in 2018, the volume often fell below $5bn per day. This month’s trade volume averaged around $24bn, highlighting consistent market interest in the world’s preeminent cryptocurrency.
COVID-related monetary stimulus measures and subsequent inflation fears have encouraged countries like El Salvador, and financial institutions, such as investment bank Morgan Stanley (MS), to begin accumulating bitcoin or offering clients access to it.
The topography of late 2021 "is very different to 2017", said Anton Chashchin, managing partner of Bitfrost. Speaking to Yahoo Finance he explained how the 2017 bull run was "largely defined by a snowball of retail investors, but this one is being driven by an influx of institutions".
He pointed to major institutions "integrating cryptos or launching their own crypto-related services", such investment bank JP Morgan (JPM) developing its Blockchain Center for Excellence, that spawned the rapidly rising Kadena (KDA-USD) cryptocurrency.
Anthony Portno, founder of Traders of Crypto, went further and flipped the narrative when comparing 2021's bitcoin price trajectory with that of 2017. After chart comparisons, he concluded that "we are currently at a level before a dramatic rise not before a crash", because "the bitcoin price is currently quite low relative to its moving average".
Looking back over the last 12 months, he said: "The price went up dramatically in late 2020 and early 2021 when it did look overbought but it has dropped back since to a level that looks quite cheap."
The 2017 cryptocurrency ecosystem was as a “self-contained bubble” with no significant influx of institutional capital, said Sam Kazemian, founder of Frax. Whereas, now major financial institutions are initialising long term accumulation of digital assets.
The global cryptocurrency market is still dwarfed by the traditional markets such as the foreign exchange and the New York Stock Exchange (^AMZI), both of which have market capitalisations that are measured in the quadrillions.
In comparison, the global cryptocurrency market is worth $2.6trn. This suggests that there is much more room for expansion for bitcoin and other digital assets.
Traditional investors are discovering bitcoin as a hard asset alternative to gold. Bitcoin is currently only assuming a fractional share of gold’s utility as a store of value, but this share is forecast to increase and as the cryptocurrency space expands more traditional assets will become digitised and tokenised on distributed ledger technology (DLT).