What happens to bitcoin in times of crisis?

What awaits us on the world markets in the upcoming period? What impact will the global pandemic of COVID-19 have on a price of Bitcoin? These and other related issues have been addressed by many experts across the "crypto community" over the past few weeks. Although many differ in short-term predictions about the development of price of Bitcoin (and other cryptocurrencies), they all more or less agree on the one long-term prediction: we do not have to worry – Bitcoin will survive. However, the question is at what price and at what residual value.

 

The price of Bitcoin is, as we know, extremely volatile. Most of the public might think and assume that a price of Bitcoin will go down steeply during sales at a time of crisis. This premise has its logic as the deep fall of prices of financial instruments is a phenomenon indisputably accompanying every economic crisis. Moreover, according to recent developments, cryptocurrencies are noticeably influenced by the atmosphere of world markets. Does this necessarily have to be the case of Bitcoin? Possible collapse of the financial markets will certainly affect the price of Bitcoin (and has already affected it significantly) but allow me to argue a bit.

 

Although, we have witnessed fall of Bitcoin from around USD 9,000 to almost a half price in the last 3 weeks, I dare to say that this scenario does not necessarily need to continue. Leaving aside the approaching Halving in mid-May of this year which, as a highly anticipated event, promises potential growth of Bitcoin value and has been spoken about in the community since the second Halving event in 2016[1], one of the potentially important drivers for growth is – maybe paradoxically – a behavior of central banking authorities.

 

In this context, latest news should not be ignored: The Federal Reserve (FED) intends to introduce series of strong measures to support the economy, including unlimited securities purchases and new loaning programs. The FED said it would purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy. It will also create three new facilities to provide up to $ 300 billion (CZK 7.7 trillion) into the economy. The money should be used for loans for businesses as well as consumers.[2]

 

In fact, this FED step could benefit Bitcoin. The logic in the matter is that any quantitative easing of a greater extent (and even more so of the American type) entails precisely the named negative consequences and phenomena that basically led to the emergence of Bitcoin as such. Bitcoin is built on counterparts of these consequences and phenomena – a currency that is not a subject to any control, has deflationary nature and no central authority can interfere therewith; that is what Bitcoin proponents yearn for.

 

Given the planned interventions of the FED as well as other national banks, it can be assumed that these steps could serve as an incentive to purchase Bitcoin as a result of mistrust of some investors in traditional monetary policy in my opinion. A drastic fall in a price of Bitcoin and a bleeding of cryptocurrency markets (as predicated by some) do not necessarily need to occur. What will ultimately decide, however, will be further development of the pandemic, particularly in the United States of America which currently has the most confirmed cases of COVID-19. It is unclear how the world markets will continue to respond to this situation and whether (how much) they will “bring Bitcoin down” with them.

 

Despite its decentralization it is no longer true that Bitcoin is completely independent of the surrounding economic events in the real world. A collapse of financial markets as well as the general decline in trade exchange will, therefore, surely affect its price. But, only time will tell us to what extent.

 

Purpose of this brief reflection is not to predict Bitcoin exchange rate. This article is not an investment advice nor investment recommendation.

 

ARROWS advisory group

Matyáš Moska
Attorney
T: +420 605 006 807
E: moska@arws.cz


 

[1] The optimism was derived from the previous Halvings which were always followed by a significant increase of Bitcoin value.

[2] Federal Reserve announces extensive new measures to support the economy [online]. BOARD OF GOVERNORS of the FEDERAL RESERVE SYSTEM, March 23, 2020 [cit. 2020-03-31]. Available on: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm

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