The world goes through a major financial crisis every few years. Some of the past crises have included the dot-com bubble, the global financial crisis, and the great depression of the late 1920s. Although these crises are usually bad, they lead to fresh opportunities for investors. In this article, I will explain 5 key reasons why Bitcoin is the best investment asset in the time of the Coronavirus.
Let us look at how Bitcoin has traded during the Coronavirus pandemic and why it dropped. While pandemic began in late 2019, global concerns started in February this year. This is when the number of cases started to soar. It was also the same time when the number of cases outside China started to rise as well.
Bitcoin did not perform well during this time. In fact, at some point, its price dropped by more than 34%.
Why did this happen? I believe Bitcoin price dropped because of four major reasons.
The drop in price happened at a time when most asset classes were dropping. As a result, some crypto holders decided to exit their trades during the panic.
As with all assets, cryptocurrencies are driven by demand. When markets were plunging, demand from large institutional investors was not there. This is because these investors were focused on their heavy losses in the stock market.
As other markets were plunging, many investors who use margin to invest decided to liquidate their Bitcoin holdings to prevent margin calls. When a margin call is triggered, investors lose money they have invested.
Finally, as it became clear that many cities would be locked down, many Bitcoin holders decided to liquidate their Bitcoin holdings to cash.
I believe that there are five key reasons why Bitcoin is a perfect investment in the era of Coronavirus. Let us look at these reasons:
Financial crises are tough. However, in reality, history shows that markets tend to recover over time as more confidence returns to the markets. Since Bitcoin is a relatively new asset classes, let us look at how stocks have performed over time.
In the chart below, I have plotted the S&P 500 index versus the Dow Jones Industrial Average (DJIA), which are the biggest indices in the world. I have also marked some of the biggest dips, including the 1987 black Monday, dot-com bubble, global financial crisis, and the 2010 flash crash.
On this chart, we can see that markets tend to recover over time after a bad crisis. The same will happen with Bitcoin. The price will recover as stability returns in the overall market.
Central banks and governments have rushed to rescue the market as Coronavirus cases have risen. The obvious thing that most governments have done is to pump money in the financial system. The United States has been a leader in this. Consider this. The Fed has said that it will offer an open-ended quantitative easing. This is a complicated way of saying that it will create money in thin air and pump it in the financial market. In the last financial crisis, the Fed printed more than $4 trillion.
The decision by the Fed to start an open-ended QE means that the amount will be significantly higher this time. This is because the scale of the current crisis is much bigger. Therefore, at minimum, we can expect the Fed to print more than $4 trillion. It does not end there. The US President, Donald Trump, has just signed a $2.2 trillion relief package, that includes direct payments to individuals. Just look at how the Fed’s balance sheet has increased over time.
What does all this mean? It simply means that the value of money will go down and investors will seek safety in other assets. Some of these assets are Bitcoin and gold. In the past era of QE, the value of the dollar dropped and gold, the then safe haven, rose.
Bitcoin demand started to decline as the Coronavirus crisis continued. This was an expected move because many investors were selling Bitcoin to cover their losses elsewhere. However, there is evidence that Bitcoin demand is rising especially after the U.S. president Donald Trump and the Senate approved S$2 trillion Coronavirus stimulus.
Meanwhile, the interest and search for the term Bitcoin has been increasing on Google as shown below.
As the Coronavirus crisis eases over time, we expect more demand for Bitcoin as investors diversify their holdings. A rise in demand, while supply will be limited means that the price of Bitcoin will continue to rise.
As you probably already know, the maximum number of Bitcoins that will ever be mined will be 21 million. When Satoshi Nakamoto created the system, he put in place measures to ensure that the supply is controlled. He ensured that the supply will be limited over time to boost the prices. One way he achieved this was through the process of halving or halvening.
This is a process where the quantity of Bitcoins that are mined decreases by half. The process happens, and will continue to happen until at least 2140, when the last Bitcoin will be mined. It has already happened before. When Bitcoin was introduced, miners used to get 50 BTC per block. When the first halving happened in November, 2012, the number of rewards was reduced to 25 BTC per block. Another halving happened in July 2016, and the number of blocks was reduced again. The upcoming halving will see the number of blocks reduced to 12.5.
In essence, halving is a catalyst because it pushes the price of Bitcoin higher. This is simply because the number of Bitcoins that are available to be mined decreases leading to higher prices. I expect this situation to happen ahead and after halving that will happen between May and June.
Finally, I expect Bitcoin to be a good investment in the Coronavirus era because of its role as an alternative investment. Bitcoin is the biggest alternative investment in the world. As of this writing, BTC is worth more than $115 billion. As calm and normalcy returns to the market, I expect the price to appreciate as institutional and retail investors move to buy it.
Bitcoin price has declined slightly during the era of Coronavirus. As I have explained, this was panic selling as other asset classes too declined. This crisis will not last forever. The Bitcoin price climbed from under $4,000 per Bitcoin to around $7,000 in the past two weeks. I expect the price to rebound further as more demand comes back ahead of the halving that will happen this year.