In this article, we will discuss Why Bitcoin is a safe haven and how it can perform during the next financial crisis.
The proponents of Bitcoin and cryptocurrency are often criticized for their exceptions of doom. However, the fact that it was born in the aftermath of a crisis to act as insurance against unforeseen circumstances in the future is now coming to light again.
As the world struggles to contain the spread of the deadly Coronavirus, all asset classes are witnessing a downfall. Moreover, the emergency economic measures taken by the Government which primarily involve printing more FIAT currency and lowering interest rates to avoid depression are coming to exhaustion as well.
Nevertheless, in the long-run it is driving the world into a deflationary crisis during times of low productivity.
Even during the recession of 2008-2009, we saw inflation rate fall below 0%, marking a measurable decline in the cost of goods and services.
Through Central bank intervention in the past decade, the leading economies have been able stabilize the economy. However, the steps taken involved increasing the supply of money and decreasing the interest rates.
The investors and businesses are now looking to save liquid money as insurance for the future. This leads to a decrease in the demand for goods and services, which increases the rate of employment and default on debts.
Hence, to address the novel situation, now the Governments and Central Banks are left with little ammo in their arsenal to address the hardships ahead.
To understand how safe-haven assets like Bitcoin and Gold can provide insurance for the upcoming crisis, we need to understand how the world ended up in such a situation.
The Collapse of the Housing Bubble
The housing bubble was created during mid 2000, when the price of real estate began sky-rocketing. Moreover, the demand for mortgages and new properties kept on rising, reaching a high in 2006. Eventually, the prices started taking a downturn. Then in September 2008, the bubble burst as people rushed towards an exit.
By using derivatives of various kinds, the banks oversold mortgage-backed securities coupled with huge leverage. The belief was simple,
‘Who doesn’t pay mortgages?’
Eventually, as the productivity dropped and the people started defaulting on their mortgages, on which the entire housing market bubble was built, collapsed.
The S&P 500 index dropped over 45% from the beginning of the crash in September 2008 to March 2009. This crash caused the recession of 2008-2009 with high levels of employment, inflation and declining asset prices.
Quantitative Easing
The stock markets have been in a major uptrend since then. The wheels of capitalism continue to induce money driving asset prices to new All-Time Highs.
Presently, the panic due to Coronavirus has already caused a 35% drop in the index in less than 5 weeks.
Warren Buffett, Billionaire investor and the CEO of Berkshire Hathaway notes on the market sentiments, that it is similar to the ‘fog of war’, when the military is uncertain of their and their enemy’s capabilities. The financial markets at this stage are unable to fathom the degree of the sell-off or finding the bottom.
The Governments and Federal Reserves of various countries are resorting to Quantitative Easing of last resorts which involve, lowering of interest rates to zero, printing indefinite amounts of cash and buying stocks and assets to protect the economy from falling into depression.
However, this is resulting in the compilation of the national debts. Moreover, by driving the interest rates to zero, the FED has practically exhausted its income on the money it is printing indefinitely.
The high levels of national debt will hurt the under-developed countries most. Due to the lack of self-sustainability of countries in South-America, Africa and the Asian subcontinent which usually rely on exports and remittance from other countries, will be extremely hit by the slow-down.
Why Bitcoin?
On 31st October, 2008, the alias Satoshi Nakamoto published the whitepaper titled – Bitcoin: A Peer-to-Peer Electronic Cash System. Later on 3rd January 2009, the person or group mined the genesis block of bitcoin (block number 0). It also included a message which read:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.
It refers to the headline on The Times on that day, at the height of the recession. The idea was to restrict the indefinite money printing and bail-outs which in reality hurts the taxpayers. Nakamoto created an economic system that was ‘trust-less’ and has a definite supply. Hence, no extra amount of Bitcoins can be created and distributed to help the one’s undergoing major crises.
Bailout refers to the process of providing emergency liquidity to companies and institutions from the Federal Reserves of a country. The Emergency Economic Stabilization Act of 2008 was passed as a countermeasure to bail-out the banks which were unable to function during the crisis.
In his recent article on economic paradigm shift, Ray Dalio, an economist and billionaire hedge fund manager mentioned that this cannot go on forever. The debtors (Federal Reserves, Banks) are likely to get squeezed by increasing default on credit and borrowings.
Attributes of Bitcoin in the Current Environment
Apart from being a self-sustained economic system, based on accountability, constant supply and transparency, there are certain social factors which are now beginning to favor Bitcoin as well.
‘Not your keys, not your Bitcoin‘, a popular phrase among Bitcoin HODLers which stems from the distrust in third party custodians of wealth beginning with the banks, and now extending to crypto-exchanges.
Moreover, more and more millennials are convinced of the economic hardships that they are likely to face in the times ahead. According to a Facebook survey in 2016, about 45% among them are ready to switch to better options, when one comes along. The youth of today has little hopes of retiring with enough savings as well.
Furthermore, the internet along with social media platforms have already transformed the way information is shared across the world. This freedom of a trust-less system and accountability is now warranted in the transfer of value as well.
What Now?
The present lock-down of 2020 due to Coronavirus and downfall in asset prices is beginning to hurt the major industries again. These employees have a large number of people and have a huge customers base as well.
In a sense, capitalism has helped in the monopolization of several industries to the point that they become too big to fail. However, it is against the principles and spirit of capitalism. Veteran trader and analyst, Peter Brandt, notes on the current economic crisis,
There is talk about Boeing bail out. Totally opposed. I’d let Boeing go into chapter 11. Let companies restructure & comes back with clean balance sheet. That’s capitalism. Bail outs socialize losses, privatize gains. Retirees/savers are going to get totally stiffed again.
During the first panic move of the last financial crisis, gold and silver prices also dipped along with the equity markets. However, the commodities market began its recovery in less than a month, while the stock markets continued its downtrend.
One of the leading reasons of the housing bubble and stock market bubbles is high leveraged over-borrowing in the economic sector.
Risk averse investors and traders will flock to safe-haven like gold during these times. When the demand for the US Dollar will decrease in the aftermath of the crisis, it will likely shift towards hard money like Gold. Leading crypto on-chain Analyst Willy Woo, tweeted,
Seeking the decoupling… Here’s where we are in the timeline compared to the 2008 banking crisis. Decoupling of safe havens from equities showing hints it may have begun (i.e. when BTC and Gold go bullish). We’ll have more confirmation in a week.
Micheal Novogratz, the founder of Galaxy Digital and billionaire investor notes,
$BTC will continue to be volatile over the next few months but the macro backdrop is WHY it was created. This will be and needs to be BTC’s year.
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