Bitcoin: 10 Years Since Cyprus (Cryptocurrency:BTC-USD)

March 2023 marks ten years since the Cypriot bank bail-in. Without getting into all of the brutal details of what caused the issues, strictly at a human level the ramifications of the banking crisis were profound. After making a deal that would see the banks ‘bailed-in’ at the expense of depositors, the banks closed and rationed withdrawals in an attempt to prevent a total run on assets:

There are fears that as soon as the banks do open their doors, Cypriots will try to withdraw as much money as they can from their account.

Depositors were effectively locked out of their accounts and the idea of non-custodial digital currency immediately started to pick up some steam.

Bitcoin Moons After Cyprus

It may not be well understood by Bitcoiners who have joined the network in this most recent bull run, but the Cypriot bank crisis led to a bit of a coming out party for Bitcoin (BTC-USD) back in 2013:

2013 was still very much the early days of the network. Aside from the Winkevoss twins and maybe a handful of other notable investors in Silicon Valley, there were very few people talking about, let alone buying bitcoin, at that time. But that changed when BTC holders enjoyed a 600% rally over just a few weeks following the Cyprus bank bail-in. Suddenly, there were mainstream media outlets recognizing the connection between the rise in bitcoin’s price with the crisis in Cyprus:

Today, it’s worth $72, largely because of “incremental interest” from euro and Russian ruble holders who are terrified by the situation in Cyprus, said Nicholas Colas, chief market strategist at ConvergEx Group, a financial technology company in Manhattan.

Following the big surge in price, non-zero wallet addresses holding bitcoin surged 22% by the end of April 2013.

Network Growth

Over the last 10 years, the growth in Bitcoin has continued and it goes well beyond the dollar denominated price of BTC – which at $22k is still up a staggering 62,000% since the Cypriot bank crisis. Back then, the annual inflation rate of BTC was over 14%. Today, that annual inflation rate is now under 2%.

When we adjust our market valuation framework to realized cap in an attempt to account for all of the new coins that have come into circulation since Cyprus and the price that has been paid for those coins, we can really get a sense for how incredible bitcoin’s valuation journey has been over these last 10 years. In mid-March 2013, the realized cap was $156.2 million. It’s now nearly $382 billion, a simply astronomical increase. And this is dwarfed by the growth in mean hash rate which can only be described as parabolic:

The mean hash rate, or the computational power allocated to securing Bitcoin, is up 852 million percent since Cyprus. From a user standpoint, we’ve seen clear network adoption in the key metrics judging by the 3,353% increase in non-zero wallet addresses and the 1,581% increase in active addresses:

Click to enlarge

Source: CoinMetrics

What I find really interesting from the table above is the Supply Equality Ratio, or SER. According to CoinMetrics, the SER is similar to a 20:20 wealth ratio in traditional finance:

Instead of income, the SER looks at supply held by different accounts within a network. It compares the poorest accounts (the sum held by all accounts with a balance less than 0.00001% of the supply) against the richest accounts (the sum held by all the top 1% addresses)

Essentially, the SER tells us if coin supply is distributed well or not. To provide some context for Bitcoin’s SER compared to other cryptocurrency networks, I’m showing SER trends for the various payment-focused proof of work coins in this chart:

While Zcash (ZEC-USD) actually does come pretty close to Bitcoin’s SER, there isn’t any other cryptocurrency that is distributed among big holders and small holders as well as bitcoin is and that distribution has only improved over the last decade.

Why Does Bitcoin Exist?

Is it a store of value or a medium of exchange? I don’t know if anybody really knows for sure what the network will be ten years from now. Throughout its history, I’d argue that bitcoin has been a really simple narrative trade when you strip away all the noise. The most straight forward way I think we can look at BTC is as a bet against the current system. Hedge against inflation? More debatable. But it is very much a hedge against banking custodians and central planning.

And that’s a hedge that I believe warrants some attention. Cyprus may or may not be the most egregious example of bank/depositor betrayal. But even the more recent Canadian trucker protests showed why decentralized currencies should be considered:

The prime minister has invoked emergency powers that allow him to “commandeer” banks and insurers. Despite the fact that peaceful protest is constitutionally protected in Canada’s Charter of Rights and Freedoms, two key protest organizers were arrested in the capital of Ottawa last week. GoFundMe fundraisers have been shut down and bank accounts have been frozen without a court order.

When GoFundMe became compromised, Canadian protestors found financial aid through Bitcoin. But the larger issue here isn’t even protesting or circumventing the state, it’s simply wise to hedge trust in third parties by putting a little bit of trust in yourself. Paul Krugman doesn’t seem to be suspected of any crimes, yet even he found his Venmo account to be unusable on Wednesday. He said on Twitter:

I’ve been using Venmo for years, but now it won’t allow me to make payments. I spent a long time in chat with representatives, and they told me that they can’t explain why – or fix it. The software has taken control.

Krugman’s problem ended up getting handled but the cost of his openness came with a sound dunking from crypto advocates who first pointed out how Krugman’s prior views on custodians were contradicted by his own experience. And then again with those same crypto advocates noting how most people can’t simply tweet their displeasure to 4.5 million followers to get attention on their problem. This is why the distribution of BTC is so important; guys like Paul Krugman, Charlie Munger, and Jamie Dimon don’t need bitcoin. But the ‘filthy masses’ might.

Investor Takeaway

‘Not your keys, not your coins’ is a lesson that, apparently, has to be learned again and again as history finds ways to repeat. It’s very easy to sit comfortably in the western world with the perception of safe and regulated banking institutions and not understand why anyone would feel compelled to purchase assets that live outside that world. But history shows that banks are capable of making bad bets or bad decisions.

Even the banks that serve crypto markets as we just learned from Silvergate Capital (SI) can succumb to poor choices. 10 full years since Bitcoin’s 600% single-month rally in response to the Cyprus bank crisis would indicate this is an asset that has staying power.

Bitcoin has seen several face-ripping rallies since Cyprus. One thing Bitcoin has yet to see is a rate hike cycle quite like the one we’re currently in. Price is price and that will fluctuate. Holders, hash rate, transactions, and active addresses tell the real tale. How valuable is code? That may depend on if your bank will let you use your money or not.