The year 2020 has been the most challenging year in decades with Covid-19 having a significant negative impact on the global economy and hence the global markets. Several countries resorted to lockdowns to flatten the curve of the infection which led to a loss in business. Almost all economies are on the verge of a collapse. The virus has led to a crash in the stock markets around the world and oil prices have fallen significantly. There was a time when crude oil was selling at a price less than USD 0. As per a Reuters report, since March 21, more than 36 million have filed for unemployment benefits, which is almost a quarter of the working-age population. Moreover, the IMF estimates that the global economy will grow at -3% in 2020.
Although Bitcoin witnessed a steep fall in price during mid-March, as people were running towards liquidity, its market capital has only increased gradually with more volatility being seen in the Capital Markets. The stock markets have performed well on some days and worse on the other depending on the stimulus packages announced by the governments and the losses due the lockdown.
Recently, we saw Billionaire Paul Tudor Jones claiming,
“My bet is it will be bitcoin’, as the best inflation hedge.”
This news spread like wildfire, especially because it came from an eminent person in financial markets. Talking about his positive opinion on Bitcoin, Jones published his Market Outlook note called “The Great Monetary Inflation" in collaboration with Lorenzo Giorgianni, the deputy head of the IMF's policy department.
His primary reason for trusting Bitcoin is because of the relatively and significantly low inflation rate that Bitcoin has shown over the years.
Bitcoin acting as a hedge against inflation also means that it has proved itself to be an impressive store of value. An asset's store of value can be measured based on 4 characteristics: 1. Purchasing Power, 2. Liquidity, 3. Trust, 4. Portability. Bitcoin has already won the race in Liquidity and Portability being a completely digital currency that can be instantly cashed out on various exchanges like CoinDCX. Purchasing power, in general, is the amount of goods and services that can be purchased with a unit of currency. This metric holds a direct correlation to inflation as the asset can retain its value over a longer period of time. Bitcoin's primary reason for its low inflation can be attributed to the fact that it is the only globally tradable asset that has a fixed supply of 21 million out of which 18 million have already been mined. Limited supply and increasing demand, the objective with which its unknown founder Satoshi Nakamoto established this principle, is playing a crucial role in the time of this crisis.
Until mid-March, the cryptocurrencies were declining along with the stocks, and the correlation between the BTC exchange rates and the S&P 500 index set a new record. From February 20 to March 15, S&P 500 decreased by around 30 percent, while BTC's price nearly halved, from ~ USD 10000 to ~ USD 5000. However, after the announcement of the emergency measures by the Federal Reserve on 16-17 March the markets no longer correlated with each other. The correlation between S&P and BTC decreased sharply, and the cryptocurrency exchange rates began to grow despite a further decrease of the indices. By March 19, BTC had already crossed USD 6000. At the time of writing, BTC is trading at USD 9416. According to Victor Argonov, senior analyst and a crypto specialist at International Investment firm, EXANTE, this was most likely due to the investors' fears of the US dollar devaluing after the Federal Reserve's drastic measures.
Well, the debate about Bitcoin being a safe haven will continue till eternity. What needs to be considered is whether it is a better store of value than gold. Despite being the most popular metal, gold has faced its own share of failures during times of liquidity and inflation problems. For example, President Franklin D. Roosevelt in 1933, during the Great Depression, banned private gold ownership and fixed the price of gold at the US $35 from 1934 for many years thereafter. Naturally, this has led to Bitcoin and gold competing with each other for the status of a more effective protective asset, and in this situation, cryptocurrencies have an advantage. Metal owners are bound to depend on transport and logistics - sectors of the economy that are prone to supply disruptions and logistics issues, given the times. Meanwhile, Bitcoin is a digital currency that is neither constrained by state borders nor does it have any transportation problems. This makes Bitcoin portable and easily accessible to people across the globe.
Even though people remember Bitcoin for the rapid price increase in 2017, it still attracts those who see the degree of freedom inherent in it during this time of fragility and instability in the global financial system. When most economies around the world are failing and companies are getting debt-ridden, people are losing their jobs and survival is becoming more and more difficult - Bitcoin is independent of this economics and has contained itself in the narrow trading range of USD 8,700 and USD 10,200 in the last one month. Bitcoin has shown an exciting and promising currency development since the start of the global pandemic and as the world progresses further, Bitcoin’s value and acceptance will only grow, from remittances and daily grocery shopping to more sophisticated uses yet to be imagined and created out of necessity.
Let's keep track of the most buzzed cryptocurrency functioning entirely without authority, yet able to strive through the toughest of times only with the help of the network, the people backing it. Exciting times ahead!
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