It’s been a roller-coaster for markets these last few weeks and nobody really knows where we’re heading. But what we see in plain sight is the fragility of traditional markets. And in the midst of collapsing stock markets, economic confusion, and chaos, emerging crypto markets seem to be holding steady, with bitcoin leading the way as a budding safe haven.
The Coronavirus epidemic has already resulted in:
- Thousands of people affected
- Shut borders
- Idle airlines
- A now-defunct tourism industry
- Depressed fuel markets
- Overstressed health care systems
- Global tension and uncertainty
In the epicenter of the outbreak, the Chinese business sector is reeling from continued restrictions on travel, as well as admonitions to stay home. While the number of Coronavirus cases is ebbing, Chinese workers must go through two weeks of quarantine before returning to their jobs. The repercussions of widespread factory shutdowns and business closures are yet to be understood.
Worldwide, COVID-19 has now spread to people in over 75 countries as of this writing. On top of all this, there’s a lack of confidence in the information we’re getting out of China, the US, and anywhere else for that matter.
Last week the Dow and most major traditional markets crashed to historic lows, adding to the pandemonium. In a delayed response, cryptocurrencies led by bitcoin, for the most part, acted similarly with a large dip in price. Incidentally, such market dips are not that unusual in the nascent crypto markets. Additionally, we’ve seen bitcoin and other coins creep up into the green a little more quickly and significantly than the Dow.
Last week, the US administration and the Federal Reserve signaled that an interest rate cut or cash infusion (more dollar printing) would be available to help keep the economy on a growth trajectory. In fact, it’s been growing and in a bull market since the 2008 financial crisis.
Many people did not expect action to happen so quickly, but this week the US Federal Reserve issued an emergency rate cut of 50 basis points (0.5%). Central banks from Hong Kong and Europe followed suit or at least vowed to.
But the unexpected happened. Stocks and bond yields both dropped significantly directly after news of the rate cut. It appears the action did not allay the worries of investors as hoped. The US 10 year treasury note yield hit a new all-time low. It’s under 1% for the first time ever and is now devoid of wiggle room.
1-day charts for the Dow and bitcoin:
From this snippet in time, on the day the US Fed instituted an unprecedented emergency rate cut, we see bitcoin correlating to the news and then seemingly moving on. The Dow, on the other hand, reacted more strongly. It’s possible this happened in light of the political and economic uncertainty surrounding the Coronavirus and subsequent economic breakdown.
“The Federal Reserve is running a marketing campaign for bitcoin”Anthony Pompliano
Another reason may be the unexpectedness of the rate cut. Some say it came far too soon and was too steep since rates as low as 1% cannot continue to be cut much more. Economic effects have not yet been really felt worldwide (though we know some are to come) and already the US has used most of its economy-fortifying toolbox.
The fact that the Dow continued to plummet after the rate cut may evidence a growing worry that the ever-bullish stock market has only been so strong because of central bank manipulations. The US administration wants to see stock market growth at all costs, especially since it may mean an election. But if US stocks are showing growth while an epidemic is shutting down supply lines and storefronts, then what does that really say about the stock market as an indicator of economic strength?
We have yet to even experience the after-effects of a devastating global supply chain. As it is, only 11% of Chinese firms in a survey in late February said their production would return to normal by March. Both China and the US have officially adjusted rates to encourage lending to try and help businesses who may suffer from breaks in the supply chain and worker shortages. Central banks worldwide are addressing their corresponding economies, but as we know, in this day and age, global markets are interconnected.
How did bitcoin react to the Fed rate cut?
Again, somewhat unexpectedly, bitcoin did not react with a drop in the same way as the stock markets. Instead, we saw a quick dip and then gains after the emergency action was announced. When the stock market fell last week, bitcoin tumbled a bit as well, but not as soon, and not quite as deeply. Additionally, the bitcoin hash rate, which signals the processing power of the Bitcoin Network, continues its rapid rise, having just achieved a new all-time high:
Bitcoin as a safe haven
Before we get into whether or not bitcoin is a safe haven for investors right now, let’s first give a definition of ‘safe havens’.
Safe haven definition
A safe haven is a type of investment that attracts investors during market instability and volatility. Safe havens provide investors with a safety net from market losses during a downturn or volatile macro event. The hope for a safe haven is that provides a negative correlation when other assets see price drops.
When it comes to bitcoin, there are multiple indicators as to whether it can provide safe haven to investors amid the chaos. First and foremost, it’s an asset that does sometimes draws a negative correlation when traditional investments are down. Examples would include during the trade war news cycle in late September, 2019. The Dow saw a significant drop and bitcoin did not. Other indicators of bitcoin’s potential safe-haven status are as follows:
- CoinTelegraph reported that the managing director of Grayscale Investments, home to the largest bitcoin fund, had called bitcoin a “new investment era”. In the article, the value of bitcoin is seen as a store of value, similar to digital gold.
- Only 21 million bitcoins will ever be mined, meaning the cap will never be raised. Investors know that the value is dependent on supply and demand. As bitcoin’s value becomes more well known, at the same time it is becoming more scarce with each bitcoin halving, a feature that is hardcoded in.
- Institutional investors have been bullish on bitcoin for over a year. With Caitlen Long’s Avanti Crypto Bank in the works, we could soon see an ‘in’ for institutional investors who want to custody crypto assets in the safety of a bank environment.
- DeFi, decentralized projects, and crypto services all accept bitcoin. What’s more, the massive innovation that has been taking place in the blockchain space during the bear market is now coming to fruition. Take, for example, HedgeTrade, which recently released its beta app for blockchain verified social trading.
- The long term view of bitcoin appears very strong. The Bitcoin Network has operated unhindered for over a decade and is the best performing asset of the decade.
- The ways to use bitcoin continue to grow and expand while bitcoin transactions keep increasing:
What about gold as a safe haven?
When most people think of a safe haven asset, gold probably comes to mind. And historically it has been just that. Ivan on Tech has a different view, however, as he explains in his recent video. As far as he’s concerned, we’ve been there/done that.
The US and other countries have for sure used gold as a store of value and safe haven. During the Nixon era, America left that all behind for fiat currencies that were backed by the word and actions of the US government. So if we go to gold again, Ivan reasons, we will only end up in the same place. While gold prices may be surging after today’s rate cut, gold as a safe haven is “destined to fail”.
Bitcoin, Ivan says, is a whole different ball game. He sums up why with this non-nonsense statement:
“It is easy to store. It’s easy to transfer. It’s easy to buy. It can be used for global trade.”Ivan on Tech on bitcoin
Bitcoin for the long outlook
We can’t deny that bitcoin will be affected by macro events. And with volatile markets all around, we can’t say for sure it’s the best bet for a safe haven asset. But at this time, we invite you to scroll back up for a moment and look at those bitcoin charts again. Decide for yourself if this decentralized, peer to peer, unchangeable blockchain network may actually be on to something.
Let’s close with an interesting stat:
According to Google, there are an average of 931,000 searches each month for “USD”. For “stocks” it’s 316,000. Bitcoin? $7.5 million.