Last Updated: 8/12/2022 | 8 min. read
Crypto is a young industry with a rich history. At Grayscale, we’ve been watching and participating in crypto markets since 2013. No matter your time horizon as an investor, understanding what’s come before may help clear up misconceptions and inform future decision-making.
Our team divides the history of crypto into phases, defined by points when the Realized Price of Bitcoin (the average value of all circulating Bitcoins at the price they were bought) moved below the then-current trading price of Bitcoin.[1] Let’s get started:
2008 – 2011: The Discovery Phase
On January 3, 2009, a person or persons using the pseudonym Satoshi Nakamoto initiated the Bitcoin Network. Without liquid, efficient markets it’s hard to put a price on Bitcoin, but it traded for cents at the very beginning, and traded for tens of dollars by 2012[1]. In those days, if you wanted Bitcoin you had to negotiate a direct transaction or mine it yourself. That would change with the rise of Mt. Gox.
Before it became the first significant Bitcoin exchange, Mt. Gox began as a marketplace for a fantasy trading card game. Scrappy origins are not unheard of in finance. One of the world’s largest insurance conglomerates, Lloyd’s, began as a coffee shop. The London Stock Exchange has its origins in a group of stockbrokers who were kicked out of an established marketplace for being too rowdy. Sometimes, ambition is more valuable than decorum.
2012 – 2015: The Hack Cycle
By 2012, Mt. Gox had become a bustling Bitcoin marketplace, and new crypto exchanges, wallets, and tools were proliferating. Entrepreneurs began building now-familiar brands, including CoinMarketCap, Coinbase, and a certain Grayscale Bitcoin Trust.
Outside of trading, websites like Silk Road provided a marketplace for exchanging Bitcoin for other goods. However, the processes around custody and management of assets like Bitcoin were relatively non-existent, resulting in repeated hacks of centralized entities and more than 1,000,000 Bitcoin being stolen, including 850,000 from Mt. Gox alone.
Furthermore, law enforcement began to take notice of the burgeoning digital economy. Silk Road was shut down, U.S. Congress held its first hearings dedicated to Bitcoin, and China banned banks from handling Bitcoin. Prices began to fall, and many newer participants left the industry. Those who remained, continued to build.
By the end of 2014, the first non-fungible token (NFT) had been minted. But arguably the most important project created during the subsequent downturn is Ethereum. This introduced what would become a signature feature of the digital economy: smart contracts. The ability to program applications on top of decentralized blockchains would eventually serve as the foundation for a new cycle of innovation.
2016 – 2019: The ICO Cycle
During this period, sentiment recovered and Ethereum brought more programmability to crypto. Initial Coin Offerings (ICOs) gained immense popularity both as fundraising tools and scamming mechanisms. Many retail end-users collectively poured millions of dollars into buying tokens to support visions and projects that would ultimately never be fulfilled. This eventually led to a July 2017 ruling by the SEC that certain token sales qualified as securities under its jurisdiction, kicking off a debate over crypto regulation that continues to this day.
Beginning in October 2017, macro drivers like quantitative tightening and trade disputes prompted a sell-off of crypto and other risk assets. The total crypto market cap fell from a January 2018 peak over $700B to $105B by the end of the year.[2] Despite poor price action, some of the protocols launched during this period became core elements of today’s Decentralized Finance (DeFi) ecosystem. DeFi provides internet-native banking and financial services enabled by decentralized crypto cloud economy platforms like Ethereum. DeFi often leverages open-source software protocols and decentralized governance structures to disintermediate many services offered by traditional finance companies.
For example, the automated market maker, Uniswap, a concept theorized a year earlier by Ethereum inventor Vitalik Buterin, was created to allow permissionless asset swapping more efficiently than anything previously available. Aave was also created during this time, marking one of the first apps that allowed depositors to earn interest using smart contracts. Protocols like these became the foundation for 2020’s “DeFi summer.”
2020 – Present: The Leverage Cycle
The 2020 market cycle is a story of leverage. Between the rising popularity of perpetual swaps and the Chicago Mercantile Exchange (CME) launching Bitcoin futures, investors were enticed to begin leveraging up as government spending in response to the COVID-19 pandemic propped up the economy.
As open interest rose towards the end of summer 2021, more modest Bitcoin futures funding rates[3] seemed to suggest that the market had learned from prior mistakes. However, during this period the leverage in place was disproportionately in the hands of Centralized DeFi (CeFi).
CeFi platforms purported to offer access to DeFi-level rates of return with the ease of use, security, and product offerings of traditional financial services. CeFi platforms could offer users an interest rate based on the cash or digital assets pledged; invest in enterprises like DeFi protocols, liquid ETH staking, and loans to other crypto firms; and attempt to capture the difference. At the height of the market, Anchor Protocol yields approached 20% and Bitcoin prices peaked again at $68,990 on November 10, 2021, still the high water mark at the time of writing.[1]
Unfortunately, strategies like these that arbitrage interest rates are often exposed to various risks, namely macroeconomic challenges and duration mismatches. In early 2022, the Federal Reserve raised interest rates due to inflation concerns, and a cooler macro environment did not help the fortunes of CeFi. Prices fell, and leveraged positions began to unwind.
Now: What’s Next?
The rest of the history of crypto is still being written. Have we reached the point in the cycle when visionaries began laying the groundwork for the next wave of innovation? Read our full report for a detailed look at the current cycle, and where we see areas of resilience.
[1] Source: Coin Metrics
[2] Source: CoinMarketCap
[3] Source: Glassnode
