The whipsaw turmoil of the last month is difficult to accurately quantify. As we come into an atypically sunny and warm April — in Europe at least — It feels like we are living at a point in time that future generations will look back on and wonder how the hell we all got through it.
Economic, political, monetary, medical, systemic: the decisions authorities have made and are making now will be scrutinised for years to come.
And as I write this the UK Prime Minister is just out of intensive care. 83,401 people have succumbed to the virus sweeping the globe, a figure which will be far higher by the time you read this.
Once the world comes out the other side of this horror show, we may all be suffering a kind of collective post-traumatic stress disorder from seeing institutions crumble in the face of such intense pressures.
It feels too early, still, to think of the opportunities coming out of such an unprecedented situation, where a third of the world’s population is living under some kind of lockdown to contain the spread of SARS-COV-2 in the midst of a 200-country novel coronavirus pandemic. But in the middle of all of this, we have cryptocurrency markets.
The scarcity theory of cryptocurrency has been proven exactly correct, as central banks have moved to throw their various kitchen sinks to shore up plunging equity markets. One need only look at the Federal Reserve, which has now committed trillions of dollars of newly-created money to buy up government bonds and vastly inflated corporate debt, and helicopter $1,200 cash payments to households and businesses.
The actions here are little different to the bank bailouts of 2008, which led indirectly to the creation of Bitcoin. Let us not forget that Satoshi Nakamoto, whoever they are, took furious inspiration from the government intervention in failing systems to write the famous white paper for peer-to-peer cash which started so many of us on this journey of discovery into cryptocurrency.
10 million Americans have already filed for unemployment in the last two weeks. If it was not already clear, these are historic numbers. It is little wonder that President Trump wants to reopen shuttered economies against the advice of his top virologists. They are not set up to work with zero cashflow powering the system. Modern economies, no matter how resilient, cannot operate in a vacuum. Cryptocurrencies, of course, unlike their fiat cousins, have no such structural reliance on bricks and mortar high street shops and businesses.
Anyone who has watched the spectacular collapse of an 11-year equity bull run come to a dramatic end will now turn to cryptocurrency — once the scrappy outsider, now a simple alternative asset class — for clues as to the state of the new economy.
How markets performed
Bitcoin, the cypher for all cryptocurrencies, has stabilised north of $7,000 a coin after the tremendous crash which saw 50% of its value disappear in a single day. That dash for cash on the back of millions of margin calls on Bitmex liquidated longs — which bigX wrote about at the time — has ended. With this forced liquidation event over, I expect more value to trickle into Bitcoin and the crypto markets as things worsen in the wider global economy.
Investors both institutional and retail have trillions of dollars of cash on hand, waiting for markets to bottom so they can feed liquidity back into the system.
Only the most ardent optimist would suggest the global economy is facing a V-shaped recovery. Many businesses, and perhaps the biggest players from the travel and leisure sectors, will simply not return when lockdown ends, that much is clear. Even before coronavirus hit the IMF was warning of a global slowdown this year, driven by a slower Chinese expansion and the US tarriff-lead trade war, something that has been almost forgotten among the pandemic.
An update scheduled for 14 April will give more detail but a 6 April overview of where we are now is stark. “The Covid-19 pandemic has pushed the world into a recession. For 2020 it will be worse than the global financial crisis,” writes the IMF’s chief economist Gita Gopinath.
The Great Bitcoin Halvening
In terms of specific prices, I would certainly expect Bitcoin to retain more of its value than beaten-down equities at this time. The spot price of gold has been rising in recent days above $1,650 per ounce, and there have been wide reports of a crippling shortage of physical gold.
And both Bitcoin and gold stand to benefit from the huge monetary stimulus from central banks to combat the long-term effects of the coronavirus.
Looking away from public health for a moment, let’s consider the Bitcoin halving. This is not an exact analogue but we can look first to what is happening with Bitcoin Cash to project where Bitcoin might go as its fourth halving approaches in mid-April.
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On 8 April 2020 at block number 630,000 BCH went through its first halving of miner rewards.
This is the first such action on the blockchain since Bitcoin Cash was created on 1 August 2017 in the primary hard fork of the original cryptocurrency. It will be approximately 1,460 days — around four years — before this happens again, at block number 840,000.
The spot price of Bitcoin Cash ticked upwards in the hours ahead of the halving, with traders parting with BCH at $251 per coin in the early hours of 8 April. This figure spiked more than 10.8% to $278 as the baked-in scarcity model took hold.
The second-most high profile hard fork, Bitcoin SV, is expected to undergo halving at block number 629,775, in just a matter of days. All eyes are now on the price for Craig Wright’s passion project for more clues as to what happens with Bitcoin.
What the experts think
Scott Minerd is the chief investment officer at Guggenheim Partners, an asset manager with $270bn assets under management, around $60bn more than the entire cryptocurrency market cap at time of writing. Minerd said in a client note that he expects equity markets to take another leg down in the weeks ahead. The S&P 500 could fall a thousand points to 1,500, which would be traumatic enough for traditional investors, if it weren’t for the fact that the frantic panic of mid-March took place over the course of less than a week. This recession will play out over months, if not years.
The speed and scale of the drops we have witnessed as investors, well, I certainly have never seen anything like it.
“When the markets start to see some of the data on unemployment rising and economic growth and corporate earnings contracting, there will be another level of panic in the market,” Minerd writes.
Emerging markets could be the next domino to fall, says Minerd, with a debt to at 180% of GDP, compared to 110% of GDP during the 1997 Asian crisis. It is little wonder, then that search traffic for cryptocurrencies is rocketing to all time highs in Peru, Guatemala, Zambia, Kenya and Nigeria, according to analysts at ARK Invest.
That investment banks like Morgan Stanley are saying now is the time to pile everything you have into stocks and shares makes little sense to me. “The worst is behind us for this cyclical bear market that began two years ago, not last month,” crows the bank’s chief US strategist Mike Wilson. “Bear markets end with recessions, they don’t begin with them, making the risk/reward [in equities] more attractive today than it has been in years.” This is codswallop of the highest order. How do bear markets end with the Dow Jones Industrial Average at an all time high of nearly 30,000 points?
Anyone making bullish projections for equity markets from a position of such incredible weakness — even with a 25% rally from recent lows, as tends to happen in bear markets — is either an idiot or a charlatan, to my mind.
It is almost as if they need retail investors to be the bigger fool and take equities out of richer clients’ hands. But that couldn’t possibly be the case, surely? I hope you sense the sarcasm here.
The only sensible move now is into Bitcoin, according to one widely-respected analyst and economist I’m following. I’m talking about Raoul Pal, a former Goldman Sachs fund manager who now runs Global Macro Investor.
“First comes the panic, which is the liquidity phase. Then the hope, which is the correction phase. And finally, the insolvency, the brutal phase that changes everything,” he said.
Seeing the worldwide nature of the coronavirus spread, Pal rebalanced his portfolio away from equities and pivoted hard toward 25% Bitcoin, 25% gold, 25% cash and 25% trading opportunities.
We have not yet seen the GDP damage done to major economies from the coronavirus lockdown. But the signs are emerging elsewhere.
The Eurozone’s second-largest economy, France, just reported its GDP was smashed by 6% in the first quarter of 2020, the steepest quarterly downturn on record. It is about to get very, very ugly out there. I would wager that cryptocurrencies will become a greater part of the portfolio rebalancing act.
Maxim Bederov is an entrepreneur and investor