Mit dem FORBES-NEWSLETTER bekommen sie regelmässig die spannendsten Artikel sowie Eventankündigungen direkt in Ihr E-mail-Postfach geliefert.
The cryptocurrency community has been waiting for over a decade to test the theory that Bitcoin is a safe haven asset that will perform well even in a financial crisis.
The West has enjoyed relatively open borders since the fall of the Soviet Union. During the past 30 years, many virus pandemics and financial crises have occurred, but walls keeping people in or out were not enacted. This time is different. Countries including the US, Italy, Austria, Switzerland, and the UK have told foreigners they are not allowed, and they have advised their citizens abroad to come home.
In response to this global shut-down, financial markets crashed. The Dow-Jones dropped 10% on March 12th and 13% on March 16th. The latter was the worst trading day in percentage terms since “Black Monday” in 1987, when the Dow lost 22%.
The cryptocurrency community has been waiting for over a decade to test the theory that Bitcoin is a safe haven asset that will perform well even in a financial crisis. Unfortunately, COVID-19 provides evidence that Bitcoin is a risk-on asset that is more volatile than the stock market during a financial meltdown. On March 12th, Bitcoin lost 37% meanwhile gold only lost 5%, actually showing investors how a safe haven asset should behave during a crisis.
However, the downward spiral only lasted a few days before the Federal Reserve stepped in with unprecedented measures aimed at propping up financial markets in the short-run. The Fed slashed interest rates to zero, injected $1 trillion a day in the repurchase agreement market every day of the month from mid-March onwards, created three new lending programs, and resumed quantitative easing with a promise to buy whatever it takes.
One thing that is important to understand is that financial markets are addicted to cheap money meaning money created out of thin air by central banks. Following the Fed’s announcement, Bitcoin recovered 18%, the Dow Jones recovered 13%, and gold fully recovered.
The lesson gained is that Bitcoin is still performing like all other assets. It performs great when central banks print money and it performs bad when central bank money is appreciating. However, this high correlation is not expected to last forever. Money printing is a double-edged sword – eventually people lose confidence in the currency’s value. We do not know when the tipping point will be, but more and more people are investing a small amount of their wealth in crypto assets and gold just in case.
Every crisis presents an opportunity, and COVID-19 has not been different so far. With rising unemployment, the central bank will need to print a lot of money in order to combat dollar deflation. This should keep financial markets humming. If central banks decide enough is enough, and they close their fiat faucets, financial markets may resume their downward trend.
Many fortunes were made during the 2008 crisis by investors that had cash and bought cheap assets. But buying cheap assets is probably not the most valuable opportunity that the current crisis presents. The current crisis has given us a unique opportunity to spend time with our loved ones, to cherish our grandparents, parents, aunts and uncles, and to reflect on our lives without the distraction of the outside world. For a moment in time, time has stopped to remind us that some of the greatest riches can be found within our home.
Author: Demelza Hays
Opinions expressed by Forbes Contributors are their own.