Understanding Bitcoin All-Time High: Nominal vs Real Value

To assess the true value of assets like Bitcoin, it's essential to account for inflation. As such, for Bitcoin to attain another record high, it must overcome its adjusted price, taking into consideration the impact of inflation.

Understanding Bitcoin All-Time High: Nominal vs Real Value
March 12, 2024
Rudy

What is a Bitcoin ATH? 

"All-Time High" (ATH) refers to the highest price level that a financial asset, in this case, Bitcoin, has ever reached. It provides a historical reference point for investors and analysts to gauge the performance of a commodity. It's crucial to distinguish between nominal and real values when discussing ATH, as the nominal value does not account for inflation, potentially distorting the true purchasing power over time. 

Past ATHs 

Bitcoin's journey has been marked by significant milestones, especially when it comes to its all-time high (ATH). These moments not only reflect the dynamic nature of the asset market but also underscore the various factors influencing Bitcoin's valuation. Let's dive into notable past ATHs and the circumstances that propelled Bitcoin to new heights.

June 2011 – $31.91: In June 2011, Mt. Gox became the largest Bitcoin exchange, and the price reached an all-time high of around $31.91 per coin.

April 2013 – $266: After several months of steady growth, Bitcoin hit another milestone when it surpassed $266 in April 2013.

November 29, 2013 – $1,242: FOMO (fear of missing out) played a crucial role in this ATH, as Bitcoin gained mainstream media attention for the first time. The speculative frenzy drove the price beyond the $1,000 mark, showcasing the increasing interest and adoption of Bitcoin.

December 2017 – $19,891: The most notable all-time high occurred in December 2017, when Bitcoin reached a peak value of approximately $19,891. This marked the end of a massive bull market that saw the cryptocurrency skyrocket in value over the course of the year.

November 10, 2021– $69,000: The 2020-2021 bull market was powered by various factors, including institutional adoption, increased mainstream awareness, and a favorable macroeconomic environment. 

Bitcoin cycles

Bitcoin cycles play a crucial role in its price movements, with each cycle witnessing new levels of adoption and market maturity. In contrast to the misconception of bitcoin as a bubble, its price cycles mirror the trends of growing adoption, technological advancements, and market development. These cycles illustrate the cryptocurrency's adaptability, debunking the bubble narrative typically linked to its price fluctuations. Moreover, it's important to note that Bitcoin has historically demonstrated an upward trajectory in the long term, underlining its resilience and potential for sustained growth.

Bitcoin Halving cycles

Bitcoin itself can be considered a black swan event, given its unexpected emergence and transformative impact on the financial landscape. Yet, the space is vulnerable to additional unforeseen factors—regulatory changes, technological vulnerabilities, or global economic shifts—that can unpredictably impact Bitcoin's price. Amid this uncertainty, tomorrow's developments remain elusive, emphasizing the inherent unpredictability and the potential for sudden price surges or plunges driven by unforeseeable events

The Halving 

The Bitcoin halving is a pre-programmed event that occurs approximately every four years, reducing the reward miners receive for validating transactions. This supply shock is believed to impact Bitcoin's price, as the reduced supply often leads to increased scarcity, potentially driving demand and pushing prices higher. As illustrated in the chart above, following each halving, prices typically rise; nevertheless, when viewed from a broader perspective, one can discern that Bitcoin consistently trends upward over time.

Current ATH

While the nominal price of Bitcoin  is what most individuals focus on, considering the real price is essential for a more accurate representation of its purchasing power over time. The real value accounts for inflation, providing a more nuanced understanding of the asset performance.

Using the example of Bitcoin's previous ATH at $69,000 in November 2021, adjusting for inflation reveals a real ATH of $76,000. This calculation involves obtaining the Consumer Price Index (CPI) for the relevant dates and applying the deflation factor to the nominal value, emphasizing the importance of considering inflation in price metrics. 

  1. Identify the nominal value of the asset (the price without inflation), in this case, $69,000.
  1. Obtain the Consumer Price Index (CPI) for the relevant dates. For example:

                            November 2021 CPI: 277.948

                            January 2024 CPI: 308.417

  1. Calculate the deflation factor by dividing the current CPI by the CPI at the purchase date of the asset:

                             Deflation factor = 308.417 / 277.948 = 1.11

  1. Apply the deflation factor to the nominal value of the asset to obtain its equivalent in real terms:

                             Real value = 1.11 x $69,000 = $76,563.86

Inflation plays a crucial role in determining the actual worth of any asset, including Bitcoin. That’s why for Bitcoin to achieve another All-Time High (ATH), it must surpass $76,563.86. Although 1 BTC will always be equivalent to 1 BTC, comprehending its real value can help investors assess the impact of inflation on their purchasing power accurately. This allows them to make better-informed decisions when buying Bitcoin.

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