In his bestseller The Perfect Storm, Sebastian Jung describes the combination of three weather phenomena that led to the most devastating hurricane in the history of the US West Coast. While one phenomenon in itself does not cause a catastrophe, it is the overlap of all conditions that made the hurricane so destructive. Is a perfect storm brewing for Bitcoin too?
It’s upside down. To mitigate the consequences of the corona pandemic on the economy, the US Federal Reserve is firing from all pipes. First the lowering of the key interest rate to 0 to 0.25 percent, then the announcement to raise short-term repo credits by 500 billion US dollars, and recently the US government is even bringing helicopter money into play. According to this, the administration of the world’s largest economy plans to issue monthly checks in the amount of 1,000 US dollars to all citizens of the country.
The measure is part of an 850 billion US dollar package designed to prevent the economy from going into a depression. It is currently uncertain how effective the ad hoc reactions of the US authorities will be. The US stock market at least seems to have recovered slightly for the time being – but whether this marks a sustainable trend is doubtful.
It is these doubts about the effectiveness of monetary policy control instruments that are also currently upsetting the Bitcoin community. It is no secret that Bitcoin as an immutable hard cash alternative attracts rivals rather than advocates of expansive monetary policy regulation. For the Bitcoin community, one thing is clear: the central banks are digging their own grave through panic reactions – and on top of that, they are likely to herald the end of fiat money.
Even if such bad news may seem overstated in the short term, it nevertheless reveals a race of narratives that has never been seen before. After all, there has not been such an unconventional monetary policy since the 2008 financial crisis – with the big difference, however, that at that time there was no alternative like Bitcoin.
Bitcoin’s ultimate test
The first ten years of the No. 1 cryptocurrency were marked by economic upswing. There has never been a bull market in history that has so reliably yielded returns of 10 percent and more per year on the stock market. BTC was rather a peripheral phenomenon. Anyone who invested in Bitcoin did so more for portfolio theoretical reasons – for example, to take up an uncorrelated asset – or out of genuine belief in Bitcoin’s value proposition.
This has changed at least since last week’s stock market slump. For the first time since Bitcoin’s existence, the global economy is heading for a recession, which many economists believe could turn into a tangible depression.
The key question now is how digital gold will behave in times of crisis. The crash on 12th March, in which BTC fell from just under 8,000 US dollars to its medium-term low of 4,600 US dollars (a crash of 41 per cent), has at least proved that digital gold is not completely uncorrelated and therefore not a safe haven asset for the short-term. In the meantime, however, and the community should draw hope from this, the price seems to have consolidated at least between USD 5,500 and USD 6,000.
Hodler solid in the saddle
The last point is decisive in this respect. Because, as we have already explained on several occasions, the liquidation of speculative assets in the event of market collapses corresponds to typical investor behaviour. The fact that Bitcoin loses value in the crash of the stock market should therefore neither worry nor surprise tough Bitcoiners. Moreover, the data situation suggests that the Hodlers in particular are still sitting rock solid in the Bitcoin saddle.
At least this is the conclusion reached by crypto company Unchained Capital, which offers analysis tools in addition to MultiSig solutions. According to the Unchained analysts, short-term speculators in particular were involved in the sale of the crypto currency, but not long-term oriented Hodlers.
On the contrary: The BTC share, which is held by long-term investors with more than five years‘ exposure, even rose from 20.37 percent to 21.65 percent in 2020. A large part of the volatility of the last few weeks is therefore attributable to the sale of UTXOs that were no more than six months old. The Amount of people holding bitcoin longer than 1,5 years has increased from 40% in March 2019 to 48% in March 2020.