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Is Bitcoin a financial haven in times of crisis? In times of disasters or financial crises, stock prices fall, interest rates decline, and debt amounts. Investors often scramble to safety by looking up to “safe haven” assets such as gold to hedge their portfolios’ value. Cryptocurrency investors view Bitcoin as the digital gold providing a reliable fallback in times of crisis.
As the COVID-19 continues ravishing the world’s economy, many economists believe that a recession is imminent. Several economists believe that the next financial recession would be worse than the 2008 financial recession in the U.S. following the US’ increasing financial obligations in mortgages, student loans, and credit card debt. Additionally, factors such as the ten-year bull run in the US equities market plus the fact that the Federal Reserve has raised interest rates three times a year could worsen the next financial recession.
Could Bitcoin be a safe haven when the world’s economy sinks into another global recession? While most crypto enthusiasts argue that Bitcoin would hold a similar place in the financial firmament as gold, others are against these sentiments stating that Bitcoin could easily be sold down in a typical recession like any other risk asset. Nonetheless, past evidence such as the 2008 global financial crisis and the current COVID-19 pandemic indicates that Bitcoin flourishes in times of disaster. Here’s a deeper insight into why Bitcoin thrives in the wake of economic turmoil.
Bitcoin Behavior in Financial Crisis
Bitcoin has always thrived in the financial crisis. Here are key examples where Bitcoin displayed an enormous rise despite a fall in the price of other assets such as stocks and gold.
2008 Financial Crisis
The 2008 financial crisis could have been a key contributor to the birth of Bitcoin in November 2008. The key highlight of the 2008 financial crisis was the collapse of the iconic US investment bank Lehman Brothers Holdings Inc. on September 15, 2008. The financial crisis led to the fall of stock prices in China and the U.S. and the collapse of the commodities market in the U.S. The financial crisis culminated in the Great Recession, which was then followed by the European debt crisis.
It is believed that the 2008 financial crisis marked the birth of Bitcoin. Satoshi Nakamoto was unhappy with the economic situation at the time and released the now-famous paper “Bitcoin: A Peer-to-Peer Electronic Cash System.” In the paper, he proposed ‘a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another party without going through a financial institution.’
As people have already lost faith in banking institutions, Bitcoin’s concept, which did not have the backing of any formal bank, appealed to the masses and was widely accepted. Bitcoin went live on 3rd January 2009 with the genesis block holding a message: The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks’, taking shots at Alistair Darling who was preparing a £500Bn rescue package for UK Banks. The price of bitcoin has been on the rise ever since the Great Recession in 2008.
Bitcoin in the COVID-19 Pandemic
Bitcoin performance in the Covid-19 pandemic is a clear indication that the coin performs well during a crisis. Bitcoin’s price rose in the course of the COVID-19 pandemic as the equities market dropped to 2017 levels. The pandemic saw stock prices in Europe and America collapse to their lowest index since 2012. The pan-European Stoxx 600 index dropped by 2.7 percent, Germany’s Dax was down 2.7 percent, and Italy’s FTSE Mib fell by 1.6 percent. On the other hand, Bitcoin’s price has been steadily rising since the start of the pandemic in January 2020. The coin was worth $9 501.38 on 31st January 2020 and is currently worth $16 074.8 when writing this article. This represents a staggering 40% increase in price throughout the pandemic. COVID-19 increased the demand for Bitcoin, leading to a massive price spark as investors rushed to hedge their assets. A research on the influence of the COVID-19 pandemic on safe-haven assets established that traditional safe-haven assets have lost their glitter. However, cryptocurrencies, notably Bitcoin, have proven to modern, haven assets.
Why Does Bitcoin Flourish During Disasters?
Studies suggest that people are increasingly looking to bitcoin as a viable alternative to their own beleaguered currencies during times of crisis. Price spikes in bitcoin have correlated with financial crises all over the globe.
In most instances, countries in the middle of a financial crisis often impose capital controls to tighten their financial control. The imposed capital controls on the population prevent the population from doing basic things withdrawing cash from banks or buying assets to hedge their funds. In so doing, most people turn to bitcoin as an alternative form of currency.
Price spikes in Bitcoin have correlated with financial crises all over the globe. When Cyprus was experiencing a banking crisis in April 2013, bitcoin price spiked to record heights. When Venezuela and Argentina reported a financial crisis leading to hyperinflation, the countries became a hotspot for Bitcoin activity. In fact, Argentina becomes the top country in the Bitcoin Market Potential Index (BMPI)-a ranking conducted by the London School of Economics.
Financial turmoil often causes the population to lose faith and believe in the sovereign currency. A typical reaction often involves the use of an alternative currency thought to be valuable. Typically, a currency value is attached to the stability of a currency. There is an inverse correlation between Bitcoin and the US Dollar, where the value of Bitcoin increases when situations aren’t great on Wall Street. There’s always an increase in the Bitcoin market cap when the US Dollar’s market cap decreases.
Two main tenets could explain why Bitcoin flourishes during the financial crises:
A Central Authority doesn’t control Bitcoin
Bitcoin is a peer-to-peer decentralized currency with a finite supply, thus impossible to control or replicate. Unlike cryptocurrencies, fiat currencies such as the US Dollar can be controlled by a small group of people in power to either increase or decrease its value by adding or removing money from circulation. The flaws of the centralized money system become evident during recessions. For instance, the 2008 financial crisis made it clear that bankers or federal government officials can’t always be trusted when making financial decisions.
An exclusive body of people doesn’t control Bitcoin’s value as it runs on a peer-to-peer system. Central banks often try to combat financial recession by printing out more money, thus devaluing or inflating the currency’s price. Bitcoin’s supply is capped at 21 million Bitcoins thus cannot be inflated, replicated, or duplicated.
Therefore, most investors consider Bitcoin as a safe alternative to fiat currencies in times of financial crisis. Many people flock to Bitcoin in the event of a recession, causing Bitcoin’s value to shoot up.
Bitcoin is Easy to Obtain
In the event of a financial crisis or disaster, it’s much easier to obtain Bitcoin than other fiat currencies. Most countries impose currency regulations in times of financial crisis. For instance, Argentina restricted its citizens from buying U.S. dollars during its own financial crisis. Unlike fiat currencies, bitcoin can easily be obtained on crypto exchanges or through P2P platforms.
In a financial crisis, stock prices dwindle, interest rates decline, and debt mounts-the economy is left in turmoil. Investors look to “safe haven” assets such as gold to hedge their assets’ value in such situations. Bitcoin has been flourishing in times of financial crisis, indicating that the coin could be used as a safe haven in times of financial crisis.
Price spikes in Bitcoin have correlated with financial crises worldwide as countries in the midst of an economic crisis impose capital controls on their population. Investors turn to Bitcoin as an alternative form of currency in the financial crisis since it’s easy to obtain and not controlled by centralized institutions. Whether Bitcoin will continue to hold up in times of economic turmoil or not, time will tell.