Did Bitcoin fail us? — AAX Academy
Bitcoin has often been referred to as a safe haven, much like a digital gold. During hard times when stocks tumble, debts increase and interest rates decline, a safe haven like Bitcoin would retain most of its value giving savvy investors a steady asset to ride out the storm. This investment narrative has always been up for debate, with some saying BTC is an uncorrelated asset so it can be considered a safe haven, and others say its volatility is very much related to the global economy.
This month, as the US stock market had its worst day since 1987, the Bitcoin as a safe haven investment narrative was put to the test — and most people have been unsatisfied with the results. Bitcoin had its most dramatic drop in seven years, tumbling dramatically from $8000 to nearly $4000, only to then recover quickly around the $5000 mark.
That’s not the price action investors expect from a safe haven, but perhaps there are extraordinary market dynamics at play that call for some tolerance. Even gold, an asset with a solid reputation as a safe haven, dropped just over 20% in a similar fashion to BTC.
So, what happened?
During times of cyclical financial recessions, trust in banks, bonds and equity is eroded which then leads some investors to park their wealth in alternative assets such as gold and more recently Bitcoin too. In this scenario, the people that believe in Bitcoin as a safe haven hold the view that while the coin is volatile, that volatility has no direct correlation to the global economic downturn. If anything, as more people buy BTC the price is likely to increase, very much the same way gold tends to perform better during economic crises.
But what is happening now is not your ordinary cyclical financial crisis, and so investors have responded differently. To put it simply, investors all over the world panicked. They panicked over a global pandemic which has put the brakes on the global economy in a way we have rarely seen before.
Entire cities and nations have been forced to shut down, and their people are told to stay at home. Considering that airlines for example are operating at a capacity below 5%, while there are still people that want to get on a flight, this is a supply-side economic crisis. The longer this situation continues, the higher the unemployment rate goes up which could lead us to a demand-side economic crisis. We have no idea how long this situation will last, but we do know it will have a significant economic impact for everyone across the world.
And so, during the panic that led so many markets to tank, there was a scramble for cash as investors pulled out of equities, bonds, gold and indeed, Bitcoin.
What’s next for Bitcoin? Will it regain safe haven status?
When the 2008 global financial crisis hit, gold fell sharply at first only to recover when monetary policies were put into place to try and save the economy. As of writing, the price of gold is almost back to just before the flash crash earlier this month, and Bitcoin is slowly but steadily climbing back up as well. BTC hasn’t recovered the losses just yet, but the overall trajectory is certainly upwards.
But even as BTC is still trading on the lower side, the fundamentals and value proposition are still the same. It is still a borderless cryptocurrency with programmed scarcity and full digital ownership, and the Halvening is still on the horizon for later this year.
However, for those who now rule out Bitcoin as a safe haven need to consider the following. The Federal Reserve Bank has cut baseline interest rates and announced the purchase of $700bn in securities and bonds to create an economic stimulus earlier this month. If history tells us anything, the real moment of truth for Bitcoin to prove its safe haven status is yet to come.
If we look at the quantitative easing programs the Fed initiated during the 2008 crisis, we can expect many more asset purchases to happen in the near future to further calm the markets. When that happens, assets with fixed supply such as gold do well — and if Bitcoin is a safe haven, it should do well too.
Originally published at https://academy.aax.com on March 26, 2020.