We analyse the drivers behind the March sell-off in Bitcoin and make a case that BTC could outperform in the long-run as monetary expansion and large fiscal deficits increase the risk of inflation in economies outside the US.
Bitcoin advocates have long been anticipating that the world’s first digital currency would outperform during the first global economic crisis of its existence. However, the initial performance of BTC as COVID-19 spreads has not been promising.
Bitcoin lost over half its value within two days in March. While it has since partially recovered, the first signs of how Bitcoin will behave in times of an economic crisis would suggest that investors will sell the asset for liquidity. But despite the initial sell-off, a strong case can be made that Bitcoin is setting up for success in the long-term.
Breaking Down the March 2020 Bitcoin Decline
An analysis of blockchain movements by CoinMetrics has highlighted that the March sell-off was mostly driven by shorter-term holders of BTC. CoinMetrics analysed revived supply on the day preceding the sell-off to gauge how much of the decline was driven by short-term holders versus long-term holders.
The revived supply metric shows how much BTC has been transacted that hasn’t moved within certain timeframes. The analysis showed that 283k Bitcoin was transacted on the 11th of March which had not been moved for at least 30 days. However, only 4,131 Bitcoin which had not been moved in at least one year was transacted. This indicates that shorter-term holders of Bitcoin were moving their BTC to exchanges to sell on the day preceding the sharp decline.
Is Bitcoin Digital Gold?
In the aftermath of the sell-off, many questioned the idea of Bitcoin being a digital gold. Bitcoin being a digital store of value comparable to gold has been one of the strongest narratives surrounding the asset in recent years. With high expectations that Bitcoin would outperform in times of economic turbulence, many believed the value proposition of Bitcoin was undermined in light of the sell-off.
Many investors still acquire Bitcoin with the viewpoint that it is a high-risk speculative asset. With many holders of Bitcoin seeing the asset in this light, it is logical that these holders would sell for liquidity when panic ensues in the markets.
However, the fundamental properties which earned Bitcoin the label of “digital gold” still remained unaltered in the aftermath of the price drop. These fundamental properties include:
- Supply cap and predetermined inflation schedule
- Computing power from specialized hardware securing the ledger and transactions
- Independence from state or other authorities
These fundamental factors are what initially led many to see Bitcoin as a digital equivalent to gold. Despite price declines, these factors have remained unchanged. Bitcoin still maintains its fixed supply schedule and has computing power worldwide securing the ledger. These fundamentals play into the bullish long-term outlook which many hold for Bitcoin. However, in the short-term, price prospects are uncertain as Bitcoin price approaches some key resistance levels.
Bitcoin Halving Uncertainty
Bitcoin price has traded in an uptrend since the sharp sell-off in March. However, an upcoming event casts uncertainty over how Bitcoin price will perform in the near-term.
The Bitcoin block subsidy halves roughly every four years and its third halving is scheduled to take place in ten days. The halving will put significant pressure on miners who generate the vast majority of their revenue from the block subsidy.
Miners provide the computing power that secures the network and some of this computing power may be forced offline if bitcoin price or fees don’t rise to compensate miners. From a fundamental perspective, Bitcoin may be less valuable post-halving if large amounts of computing power are forced offline.
In the short-term, the price prospects for Bitcoin are vastly uncertain. However, in the longer-term horizon, many of the actions being taken by central banks and governments are likely to increase the attractiveness of BTC.
Macroeconomic Developments to Push Bitcoin Higher
The following macroeconomic developments have been building a stronger case for Bitcoin outperforming over the long-term horizon:
- Central bank balance sheets ballooning and M2 money supply increase
- Higher risk of hyperinflation in domestic economies without USD as their reserve currency
- Large fiscal deficits.
As Covid-19 continues to spread, central banks have been forced to take drastic actions. The balance sheets of the leading central banks have substantially increased as the central banks expand the money supply and purchase large quantities of debt from governments.
The M2 money supply has increased 16% over the past year with a recent acceleration as central banks and governments respond to the crisis. The M2 money supply is currently $16.89 trillion with over $1 trillion being added in just four weeks.
The rapid expansion in money supply increases the likelihood that some economies may face bouts of inflation. In bouts of inflation, the prices of goods and services rise. This diminishes the purchasing power of the domestic currency and citizens who hold their wealth in the currency will also see their wealth erode.
In circumstances such as these, Bitcoin will become a more attractive option given its predetermined inflation schedule. Venezuela has suffered extreme hyperinflation in recent years. The cafe con leche index tracks the price increases for a cup of coffee sold with milk in the capital of Venezuela. The index shows inflation of 1,200% over the past year alone.
Many Venezuelan citizens have turned to Bitcoin as an alternative to their domestic currency. With central banks globally bumping their balance sheets up to extraordinary sizes, we may see more cases like Venezuela spawning over the coming decade.
Governments are also being forced to run deficits to keep their domestic economies afloat. Given that the USD is the world reserve currency of the world, the US has been able to maintain large deficits and print large amounts of money while keeping the risk of inflation low. However, other economies run a higher risk of inflation.
Actionable Investment Insights – Bitcoin Products
Google trend results for the search query “Invest in Bitcoin” highlight that interest in holding BTC as an investment has reached its highest level since June 2019. Bitcoin has certainly been touted as an investment which can serve as a hedge against economic turmoil. As we move beyond the initial price onslaught, the fragilities of the global economy have begun to pique interest in Bitcoin.
Several online brokerages offer trading products and CFDs which allow traders to gain upside exposure to Bitcoin. There are also financial products available to take short positions in Bitcoin and speculate on another sharp drop in price. We have previously reviewed the best cryptocurrency brokers. For more risk, altcoin products can also be considered which have less liquid markets and are more susceptible to volatile price movements.
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