Monday 5pm GMT: Since March 9th, financial markets are going through one of the fastest downturns in recorded history, as western economies scramble to battle the spread of Covid-19. On Sunday (16/03) the Fed announced a round of emergency rate cuts, down to a target of 0% to 0.25%, along with $700 billion worth of asset purchases, that include Treasuries and mortgage-backed securities.
Global markets had none of it; the Dow is down ~9%, the FTSE 100 is down more than 10% on the opening, while Asian markets are hit less hard, though still down to the tune of ~4% - the MSCI Asia Pacific Index was down 3.8% at the opening. As global economies go in lockdown mode, the appetite for risk has vanished, pushing bonds and all the USD forex pairs higher as capital finds its way to safety.
This past week was also the worst week for crypto since at least 2013. Amidst the global flight to safety, Bitcoin has also lost its uncorrelated status, and is moving in tandem with traditional markets, almost tick for tick. The drawdown in crypto was accelerated as highly leveraged positions on Bitmex started getting margin called, putting a liquidation cascade in motion.
Since then, liquidity seems to have evaporated, as order books across most exchanges are much thiner than usual and open interest in futures is in multi-year lows.
In all, we are now deep in bear country. Rallies are being sold aggressively, and as if everything else happening wasn't enough, with the halving coming up Bitcoin will see an additional set of natural sellers emerge; unprofitable miners. As the block rewards get cut in half, the effective cost of producing bitcoin will double. Reports have it that S19 and S15 miners are already shutting down, and that the greater mining community is in panic mode. As the BTC/USD pair edges closer to the $4k level, increasingly more miners will be shutting down and selling BTC to cover costs. Those with cash will survive this. Those without will be exiting. And as they do, prices will likely slide.
The week of March 9th 2020 was a strong test for cryptoassets; one which they failed to pass with flying colours. The narrative that Bitcoin is a store of value has come under fire.
While it has undeniable potential as a SoV asset, this week put the debate about its current status beyond any reasonable doubt. Bitcoin is still a risk-asset, as are the rest 4,000+ cryptoassets in the investable universe.
It will take some time before the global sentiment for risk returns. But, eventually, it will. Possibly not before long. And while sentiment and prices change, fundamental properties do not.
As this downturn exposed the chronic pains that underlie cryptoassets (e.g. scalability, oracles, fragmented markets), I believe that over a longer time horizon this will be remembered as a pivotal point that served as a wake-up call for builders, investors and pundits alike - to ground expectations and re-focus attention on what really matters in order to bring this technology to a massive global audience.
From an investment standpoint, the weaknesses that were exposed over the past week represent investable opportunities. There are strong teams with ample runway that are working on solutions to the industry’s endemic problems, and cryptoassets that are economically tied to the success of those solutions.
Many of these cryptoassets also happen to be priced a lot more favourably than they were just a week ago.
Over the coming weeks, it is highly likely that the pricing of these opportunities will become even more attractive.
As the global economy moves towards a recession and with interest rates being already at - or close - to 0, deflation will kick in. But then, as the effect of the coronavirus wears off, confidence will return. People will start spending again, interest rates will rise, and with all the liquidity sloshing around, eventually inflation will come around.
Bitcoin was never a hedge on a global emergency. It does though have the fundamental properties of an asset that can be a hedge on the debasement of fiat currency. And as growth - and with it inflation - returns and with the money printer already firing on all cylinders, Bitcoin will get its ultimate test.
And we believe it will succeed.
