Why has Bitcoin soared and how does this rebound differ from that in 2017

As of November 19, 2020, the time of writing this article, the price of Bitcoin hovered around $18,000. This means one thing: we are witnessing a price surge not seen since the famous bull run at the end of 2017, when Bitcoin briefly peaked just below $20,000.

While it is tempting to compare the current price surge with that of 2017, there are several key differences. The following will outline the potential factors driving Bitcoin's current price rise and explain some critical distinctions from 2017.

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Why Is Bitcoin Surging Now? The Data Tells the Story

The reason behind the rise in Bitcoin’s price is increasing demand at a time when relatively few Bitcoins are available for purchase. Although the total supply of Bitcoin grows daily as new coins are mined, the number actually available on the market depends on whether holders choose to sell or trade.

At Chainalysis, we quantify this by tracking how much Bitcoin is held in wallets that send out less than 25% of the Bitcoin they receive (which we call illiquid or investor-held Bitcoin), versus wallets that send out more than that amount (which we classify as liquid or trader-held Bitcoin).

The chart below shows the volume of each category of Bitcoin since January 2017 alongside price changes, capturing the market dynamics of the current surge compared to the 2017 run.

Currently, Bitcoin’s liquidity is similar to the levels seen during the 2017 bull market. However, the volume held in illiquid wallets is significantly higher. These wallets now hold 77% of the 14.8 million Bitcoins mined and not classified as lost, meaning these coins have not moved from their current addresses in five years or more. This leaves just 3.4 million Bitcoins readily accessible for buyers as demand increases.

Rising demand is evidenced by increasing exchange inflows and trading intensity. Trading intensity measures how many times a Bitcoin deposited on a spot exchange is traded before it is withdrawn—a strong indicator of demand on a given exchange. Currently, this intensity is 38% above the 180-day average.

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How Is This Surge Different from 2017?

The key difference lies in who is buying Bitcoin and why. In 2017, most demand came from individual retail investors using their own funds, with widely varying levels of experience and knowledge about cryptocurrencies.

Anyone who’s followed the news knows that 2020 marked the entry of institutional money into Bitcoin. From high-profile investors like hedge fund manager Paul Tudor Jones (who compared buying Bitcoin to early investments in Apple or Google) to companies like Square (which invested $50 million, or 1% of its total assets, in Bitcoin), mainstream corporations and financial institutions are turning to Bitcoin.

Institutional investors appear to be motivated by a desire to hedge against macroeconomic uncertainty—a factor that was certainly not in short supply this year. Jones himself explained:
"Back in March or April, given the monetary policies pursued by the Federal Reserve and the unbelievable quantitative easing being implemented by them and other central banks, we clearly entered an unprecedented period... People have to start thinking about how to defend themselves against inflation."

The data backs up this shift toward institutional investment. First, we’ve seen an increase in large transfers from exchanges in 2020.

Transfers worth over $1 million from exchanges increased by 19% in 2020, while Bitcoin’s price was more than $10,000 higher than in 2017. This suggests that the individuals behind these transfers have more capital at their disposal, which is expected as larger investors enter the market.

Compared to 2017, we’ve also observed a significant increase in inflows to exchanges serving primarily North American customers, while 2017’s market was more heavily driven by trading activity in Asia.

At the start of the 2017 bull run, North American exchanges saw negative net inflows of Bitcoin, only becoming net receivers as the price peaked. This time, however, North American exchanges have consistently experienced rising net inflows over recent months—higher than at any point during the 2017 bull run.

This is exactly what we would expect, as the institutional investors driving today’s price surge—mostly located in North America and Europe—are more likely to use these exchanges for convenience and regulatory clarity.

We’ve also observed that crypto-to-fiat (C2F) exchanges have seen significantly higher net inflows during this surge compared to 2017.

Back in 2017, crypto-to-crypto (C2C) exchanges—used primarily for swapping between different cryptocurrencies—drove more market activity. The rise in inflows to C2F exchanges today, coupled with the trend of investors holding Bitcoin long-term in wallets, suggests that this demand is being driven by first-time buyers and by those looking to convert fiat into Bitcoin as a hedge against worrying macroeconomic trends.

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Bitcoin vs. Ethereum: A Difference in Use Case

Comparing Bitcoin’s usage this year to that of Ethereum provides further clarity on Bitcoin’s role as a hedge asset. More and more Bitcoin is becoming illiquid, flowing into wallets that rarely transact and are used for long-term holding.

In contrast, Ethereum’s liquidity is increasing, with incoming ETH moving into highly active, recently created wallets.

The chart above shows that since mid-March, over 8 million ETH have moved into liquid wallets that were less than a month old at the time of acquisition. This marks a structural shift in how Ethereum is being used, as never before has ETH flowed so frequently into young, high-transaction wallets.

This new use case is being driven by decentralized finance (DeFi), as users send ETH into DeFi protocols where it can be used to trade a variety of assets in pursuit of yield. This difference in usage did not exist in 2017, when investors indiscriminately bought different cryptocurrencies as prices rose, aiming to profit from the hype.

The diverging use cases of Bitcoin and Ethereum in 2020 suggest a more mature market—one in which Bitcoin is increasingly seen as a store of value. Given the inflow of institutional investors driving the current Bitcoin rally, this evolution is to be expected.

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Good News for Cryptocurrency

While we can’t predict whether prices will continue to rise, the current surge in Bitcoin bodes well for cryptocurrency—not just because prices are going up, but because of why they’re going up.

Comparing this bull run to that of 2017 reveals that investors have become more informed and strategic. They are buying Bitcoin for specific use cases rather than speculating on a hot new asset.

If Bitcoin can continue to serve as an effective hedge against macroeconomic trends, we believe that more institutional investors will allocate capital to it—pushing it further into the mainstream.