The Coronavirus has truly been the black swan event that no one was expecting.
With what’s become known as “Black Monday”, this week started with a global stocks sell-off and major indexes swung dangerously close to the first bear market in more than a decade as Coronavirus fears grip the world.
The US benchmark indices posted one of their largest one-day selloffs in decades, dragging Bitcoin down and all other cryptocurrencies with it.
- The Dow Jones plummeted 10%
- The S&P 500 and Nasdaq both dropped over 9%
- Bitcoin plummeted 20%
- Based on historical volatility, -9.5% for the S&P 500 is equivalent to -51% for Bitcoin.
- Gold and silver also declined 2–3%.
Why are prices crashing?
We’ve essentially been living in a debt bubble that’s been trying to pop many times over the the last 50 years but has been propped up by central banks and government balance sheets, topping it up with more debt and keeping us solvent.
When debt grows, liquidity grows which usually means the prices of financial assets grow. But when the opposite happens; liquidity shrinks and so does the prices of financial assets, just like in 2008 and just like right now.
When this happens, banks and governments are urged to step in to fix this shrinking by injecting new debt to stimulate the economy.
Yesterday was the worst day for the markets since the 1987 market crash as panic-driven investors rushed to sell anything for cash (Bitcoin included) to protect themselves amidst the coronavirus pandemic.
What we are seeing now is liquidity drying up across the board. This means that because the number of sellers outweighs the number of buyers, desperate investors are willing to sell their assets at drastically lower prices just to exit markets.
In an attempt to fix this imbalance, America’s central bank, the Federal Reserve is injecting $1.5 trillion capital into the markets.
This tactic, commonly known as quantitative easing (QE), is an attempt to ease fears regarding access to capital and to curb the market’s downturn by injecting liquidity into financial markets, replacing less liquid assets with more liquid assets.
What does this mean for Bitcoin & digital assets?
If this capital injection manages to raise confidence in investors to reverse or slow the ongoing downtrend, we can expect Bitcoin and crypto markets to rebound as they have been moving in tandem with benchmark indices over the past few weeks.
However, this is quite possibly the last weapon in the Fed’s arsenal to prevent a recession. We already saw the Federal Reserve slashed interest rates by 50 basis points to a range of 1% to 1.25%, but the markets still halted several times.
Right now the US stock market futures are all down approximately 1%, implying that a further decline could be possible in the days and weeks ahead.
If a recession does ensue, it’s important to focus on how Bitcoin reacts thereafter, not during. It’s also important to remember that gold was never a true safe haven during the 2008 financial crisis.
Gold crashed -30% from $1000 to $700 along with a similar timeframe as that of -50% S&P500 crash. Only in 2009 did it begin to climb up to $1200.
In a liquidity crisis, cash is considered as the only safe place to store wealth. Historically, however, safe-haven assets are bought up after the market finds a bottom.
Coinciding with the halving in May 2020, it’s possible that Bitcoin could rebound massively a year later, much like gold in 2009.
Bitcoin has many advantages over gold such as:
1. Divisibility (e.g you can own or send a fraction of a Bitcoin.)
2. Verifiability (e.g. gold counterfeits are common)
3. Portability (e.g. Bitcoin can be transported anywhere in minutes)
4. Permissionless (e.g no need for third-parties like gold storage vaults)
5. Scarcity (21 million Bitcoin vs. gold’s unknown total supply)
But after the Bitcoin Halving in May, Bitcoin’s supply will also drop to an annual rate of around 1.7%. Now, this is also important because it means Bitcoin becomes less inflationary than gold (2–3%) and than central banks (2%), making it the hardest form of money in existence.
Bitcoin could quite possibly be the scarce and liquid asset many investors will thirst for.
In summary, there could be two possible outcomes:
- The Fed’s capital injection is enough to raise confidence in investors to reverse or slow the ongoing downtrend, simultaneously boosting Bitcoin and digital assets which has been moving in tandem with benchmark indices over the past several weeks.
- The Fed’s capital injection and rate cuts are unable to offset market calamity, forcing many investors to seek out sound money and safe-haven assets such as gold and Bitcoin. Bitcoin could perform similarly to gold after the 2008 recession and surge to new heights.
The Coronavirus has truly been the black swan event that no one was expecting, but what we also didn’t expect is that this pandemic would be the catalyst to accelerate the need for sound money.
Bitcoin may not be a safe haven from the Coronavirus. But its quite possibly a safe haven against banks and governments printing fiat out of thin air to cover up the flaws of the current financial system.
Above all else, you have to remember; “there is an unlimited amount of fiat to buy a limited number of Bitcoin.”
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Disclaimer: All facts and figures were correct on original date of publish. This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks and such decisions should not be based solely on the information contained in this document.