The panic has subsided on the stock markets and the omens have been bright green again for a few days now, regardless of whether Bitcoin or DAX. Which suggests that the recovery is only short-lived, that Bitcoin is lagging behind in the current deflation against the euro and US dollar, and why a special levy for future inflation winners is a buying argument for crypto currencies.

Since the beginning of the Corona crisis, the crypto-market and traditional financial markets have gone hand in hand. If you wanted to know in the last few days whether DAX and Co. opened in plus or minus, it was often enough to look at the signs of Bitcoin beforehand. For better or worse, the correlation is reaching new heights.

Since the low point of the stock markets, between March 13th and 20th, stocks like crypto-currencies could recover as it were. In the meantime, the DAX is again well over 10,000 points and Bitcoin is at over 7,000 US dollars. The impression arises that with the declining infection figures of Covid-19, the worst is over on the stock exchanges. The bottom has been reached and the large amount of central bank money can flush prices northwards again, one might think. However, there are good reasons to mistrust this train of thought.

No crisis without a bear rally

Past crises have taught us that in the major financial market crises there were always recovery rallies, which in the end turned out to be a bear rally. This refers to a temporary increase in assets, which subsequently collapse even more sharply.

Be it during the Great Depression of 1929, when the markets had risen by a full 45 percent after the first crash of 47 percent, only to collapse again with a delay by a remarkable 80 percent. On this journey to the low point of the Depression, which lasted no less than two years, there were repeated rallies of 35 percent and more, as fund manager Ben Carlson pointed out in a blog post.

Today, market cycles run much faster, but comparable observations have also been made in financial crises that are closer in time. Similar bear rallies have been found in all major financial market crises of the 20th and 21st centuries. Whether it is the Nixon shock in 1973, Black Monday in 1987, the dotcom crash in 2000 or most recently the financial crisis in 2007, the patterns and phases are all very similar. That it should be different with Corona, one can hope, but the probability is not on his side.

Many experienced market observers are therefore already betting on another crash in the coming days. For example, the well-known bond investor Jeffrey Gundlach, who told Reuters that there will very probably be a second crash in April. This should also fall below the low in March.

Secondary effects are yet to come

So far, the banks' balance sheets do not yet show any signs of crisis effects. In statements, the management boards of the banks are self-confident and stress that there is no reason for concern. After all, credit claims have not yet had to be written off, as the insolvencies and bad debts will only gradually flutter in over the coming weeks.

However, it would be naive to believe that these are merely Maredo, Vapiano and a handful of other wobbly candidates whose receivables have to be written off. Even if the fight against Corona goes better than expected and we can get the economy up and running quickly, the damage has already been done.

The effects of unemployment, lack of car lease payments, loans for the house and, in general, a standard of living that is far too much on the edge will only lead to loan defaults in the course of the year.

Sustainable recovery of DAX can hardly be explained logically

So far there is no explanation as to how predicted unemployment figures, last seen in the USA during the Great Depression 90 years ago, can be accompanied by a stock market decline of only 12 percent for the DAX and 14 percent for the Dow Jones within the last 12 months. It is absurd to believe that an explosion in unemployment figures such as we are currently seeing will have virtually no effect on stock prices.

Even cheap central bank money cannot keep driving up the prices of DAX and Co. With credit defaults running into trillions and unemployment figures like those last seen during the Great Depression, quantitative monetary measures cannot stabilize stock market prices forever. The sums that would be necessary to keep the stock markets at their current level would be so high in the long run that the current deflation would be followed by massive inflation.

If the central banks do not want hyperinflation to occur, they cannot pump money into the system at will. This in turn means that stock market prices cannot be kept constantly high. The result would be a correction determined by fundamentals or the real economy, and thus falling prices in the financial market.

Better the euro than Bitcoin

If the next few weeks should see a decent decline - which is to be hoped for, as anything else would be more than unhealthy for our monetary stability - then Bitcoin will most likely be dragged down with it and the bear rally will come to an end. After all, we are in deflation and not inflation. As a particularly liquid asset with a high public perception of risk, Bitcoin will initially come under strong selling pressure.

In 2020, fiat currencies such as the euro will still be the first choice in the crisis and not crypto currencies such as Bitcoin. In contrast to countries like Venezuela, we can still enjoy a robust currency system with stable prices. Bitcoin, as a volatile currency, is therefore currently being dropped as a substitute for fiat money. Bitcoin remains merely an asset and here the crisis knows only one direction: assets are exchanged for cash.

When will Bitcoin become the winner of the crisis?

However, this is exactly what is likely to change when we enter into inflation, i.e. when the additional money supply arrives in the system and is distributed across the existing range of goods and services. Then material assets, especially gold, can score points as protection against inflation. The digital gold Bitcoin also belongs to this type of tangible asset and should then benefit significantly as a store of value.

In the coming months the ECB, Fed and Co. will inflate their balance sheets to undreamt-of levels, following the Japanese model. The money supply of Bitcoin, on the other hand, will never exceed 21 million units. While financial assets are being drastically devalued, stable tangible assets, as in the inflation of recent decades, can help to save the assets.

However, traditional inflation winners, such as property owners with a mortgage, may have to reckon with a subsequent special levy. Remember, for example, the house interest tax and the equalization of burdens. Bitcoin owners should, however, be spared the same kind of special tax. After all, the state will hardly be able to assign the Bitcoins' affiliation to individual taxpayers. In a few months this could prove to be an additional argument for crypto-currencies.

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