The Coronavirus shook the world and our lives: the world’s financial markets have literally collapsed in the last few weeks, with the New York Stock Exchange even hitting back to pre-Trump’s White House level.
Oil has lost 60% since the beginning of the year and even gold, the ultimate refuge asset, is taking the blow.
And Bitcoin? Even the main cryptocurrency seems to have been affected by the Coronavirus effect, losing as much as 25% on Thursday 12th alone and going back to values that hadn’t been seen since May 2019.
But shouldn’t Bitcoin have behaved like a safe haven, reacting exactly the opposite to traditional stock markets? That’s the question we’re all asking ourselves…
Let’s try to analyze what happened.
“Study the past if you want to predict the future”: the crisis of 2008…
Brian Armstrong, CEO of Coinbase, commented on Twitter after the collapse on Thursday 12 March:
I’m surprised to see Bitcoin’s price drop in this situation, I would have expected the exact opposite.
This is basically the thinking of most crypto operators.
But if we look in detail at what happened in 2008 after the bankruptcy of Lehman Brothers, investors were immediately in desperate need of liquidity and began to sell all their financial assets, including so-called safe-haven assets. Lehman itself was forced to liquidate all its holdings, including those on precious metals. This tells us that not even gold (the ultimate safe-haven asset) was spared from sales in the first wave of “panic” of a financial crisis.
After this initial crisis, its price (as well as that of all other safe-haven assets) usually tends to rise.
Since Bitcoin was not yet invented in 2008, we obviously cannot know how it would have behaved. But it would most likely have suffered the same fate as all other financial assets.
Thursday, March 12, 2020: who actually sold?
As we have seen, during panic phases in the financial markets, sales make no distinction and spare no one, including safe-haven assets.
This fate has also touched Bitcoin in recent weeks, at the beginning of this new crisis.
Let us try to analyse what happened.
Chainalysis tells us that the average trade volume (between 0.1 and 10 bitcoins) has almost doubled in the days from March 9 to the 12th. This suggests that there has been significant involvement of small investors (so-called retail investors).
But what is even more interesting is an increase of 70%, over the same period of time, of transactions between 10 and 1,000 Bitcoins.
These types of transactions were certainly not carried out by retail investors but by professional operators who, this way, contributed to the price decrease (generating “panic” in small investors who, as seen, substantially contributed to the doubling of the number of transactions).
How have the whales behaved instead (the so-called 1,600 investors of the first hour who hold about a third of the Bitcoins)? Again Chainanalys tells us that, although the amount traded in the “black week” is significantly above average, overall we are still talking about 5% of the current total Bitcoin supply.
This means that the big hodlers have basically not made any significant transactions in this phase of the market.
To summarize, we can say that the market crash was initially caused by large liquidations made by professional operators, to which were added the sale orders of all those retail investors who, seeing the price collapse and driven by emotion, began to get rid of Bitcoin, further fuelling its fall.
What future awaits us
The implications of this historical moment we are living through are currently unpredictable: it is not a financial crisis like the one in 2008 but something completely different.
To try and forecast what the future of Bitcoin has in store for us, we need to analyze 3 aspects.
The first aspect concerns the very likely devaluation of the U.S. dollar due to this crisis that is affecting and will increasingly affect the global economy. Investors will be looking for assets that guarantee them a hedge: Bitcoin and gold could, therefore, be the ideal candidates to play this role.
The second is a technical aspect inherent in the bitcoin protocol: in May 2020 there will be the new halving, which will represent a real supply shock for Bitcoin, halving the reward for miners by 50% and bringing the number of Bitcoins “created” daily from 1,800 to 900.
The third aspect, but not least for importance, concerns the various Quantitative Easing operations of the various Central Banks that will flood the markets with new liquidity (estimates speak of 5 trillion Dollars), generating unprecedented inflation.
These 3 combined aspects seem to give strength and impetus to the thesis that Bitcoin will effectively outperform all other asset classes in this new crisis that is on the horizon.
As we have seen, Bitcoin has already succeeded in being the best investment of the last decade, guaranteeing a better performance than all other financial assets: the conditions for this to happen again are all there.