Why did the cryptocurrency market witness such a huge sell-off?
2020 started on a positive note for Bitcoin and the rest of the cryptocurrency market, with sharp price increases on all exchanges.
However, when the Corona Virus started to spread outside of China, people resorted to a flight into cash, meaning USD's. They sold all assets, from stocks to, yes, even Bitcoin and other cryptocurrencies, in a panic to get cash in their hands. Even gold and silver took a serious beating, before starting their rebound. Measures like air travel restrictions would stop the biggest market industry to a grinding halt and people fled the stock markets as they realized Covid-19 would impact more sectors.
After the airplane sector, other sectors followed. The tourism sector, restaurant sector, and many others were hit hard and governments finally closed their countries down to stop the spread of Covid-19. The US government created a massive relief bail-out plan to protect its citizens and companies from the onslaught brought upon them by the lock-down measures.
By now the virus has prompted other global leaders to implement strict countermeasures to stop the wild spread of the virus among its populations' most vulnerable citizens and scientists all over the world are working day and night to develop data-driven strategies as well as a future vaccine to stop the bleeding.
Fundamentally Bitcoin and the cryptocurrency market as a whole are in healthy shape, they just suffered due to the flight to cash. Bitcoin remains on track, the sector as a whole keeps innovating and adoption still grows.
What will Bitcoin do in the second half-year of 2020?
As more and more health care systems collapse under the growing stream of Covid-19 cases, we can assume that the stock markets are not out of harm's way and more pain is to follow. Governments will then need to launch even more bail-out and relief-programs, as citizens are restricted to their living quarters, unable to go to work to make a living. This new money will be used by central banks to support these citizens and to buy shares of companies that need a life-line, expanding the central bank's balance sheets and making them co-owners of those companies.
One significant problem and non-avoidable side effect of this money printing is (hyper)inflation. For the US Government, this is less of a problem because the USD is the world reserve currency and there's a huge demand for USDs momentarily. Therefore, the market can absorb these extra USDs. This is not the case for other countries who will suffer the consequences of hyperinflation, a process that will erode the buying power of their national currencies, something Venezuelans experienced lately.
Besides the crashing stock markets and bail-out plans, the trade war is still going on, creating extra pressure on global markets as the tit-for-tat tariff war continuous to nibble on margins and the bill is passed on to countries' citizens.
There's hope that President Donald Trump and President Xi Jinping can make a much-needed deal, but this deal probably needs to include how the future monetary system will be organized as it is painfully obvious that our current financial system, based on the 1944 USD reserve currency status is no longer mirroring the world's financial and economical reality.
For now, the USA can rely on the USD's status, but the odds are against the country if it believes this will remain the case going forward. At one moment we will need to create a global reset and debt jubilee, as the debt is now so huge that it is no longer sustainable and threatens to destroy any normal economic forward outlook, by pushing countries to their knees.
The everything-bubble will implode and while the world fights Covid-19, the moment has arrived to take our medicine and deal with this problem as well. This new world order will see China's Digital Yuan receiving a much bigger share as a global reserve asset and internationalize the digital Yuan, which will be rolled out later this year, despite the onslaught brought on China by Covid-19.
For Bitcoin and other cryptocurrencies, there will be significant pressure caused by these macro-economic trends, as no asset class is an island. Likely we will see more than the usual volatility in the crypto-markets as FEAR and FOMO will follow each other regularly and throw investors off balance.
A new monetary system backed by gold and/or Bitcoin?
Our current monetary system.
No backbone: no gold, no Bitcoin.
In 1944, during the Bretton Woods negotiations, the decision was made to make the USD the global reserve currency, a privilege held by the USA up to today, allowing the country to live beyond its means. Initially backed by a gold exchange standard, there was a limit as to how much money the federal reserve bank could bring into circulation, creating a sound floor under the amount of USD.
This agreement didn't last very long and the USD soon became a non-backed and non-limited fiat currency, subject to printing press frenzy, which we are witnessing now again as the massive relief and bail-out programs are partially a burden on other countries who hold USDs in reserves. But there is no alternative.
The future monetary system.
Backbone: gold and Bitcoin.
Despite the fact that the USA will do anything to hold on to the USD reserve currency status, history was witness to the demise of several empires all trying to cling on to power through the supply of their currencies. The world eventually will have a new monetary system and ideally, this will include China. China's work the last 3 decades should be rewarded and the country should be allowed to participate at a higher level, beneficiary to all global citizens.
If the USA doesn't allow China's integration within a new monetary system, an architecture that represents several large economies, then China has no other option than launching its own model and look for strategical partners like the BRICS countries. China's ambitions and the BRICS countries' response might disrupt global balance one day, resulting in the typical horrors of world wars, after which new systems historically start.
To return to a new and stable monetary system, not centralized in nature but dispersed globally, it is unavoidable to back it with a gold-like standard. As described by VanEck, a Wall Street financial management firm, Bitcoin is an even stronger monetary reserve asset than gold and will most likely become an important part of such a new system.
Is hyperinflation unavoidable?
As we progress and struggle with a debt crisis and major currency conflicts, the USD, which is often identified as the core of the problem, will most likely be the last man standing. But before it falls, we will feel the full effects of a cashless society allowing for negative nominal rates, which are just one more step away from the already negative real interest rates.
When the lack of confidence shock hits, hyperinflation will quickly cause several countries' currencies to implode, as they are trading in USD, Euro, Pound and Yen pairs, four currencies subject to quantitative easing, enabling their governments to print some of their problems away.
We already witness a huge divergence between the manipulated paper gold market and the real physical gold market, with gold almost impossible to get. Even though we are currently in a deflationary market, when we turn towards inflation it will be uncontrollable. Precious metals like gold and silver, but also the more recent cryptocurrency market will do good in this environment.
Central banks will continually need to print more money and will eventually become owners of complete industries, as they pick up shares from struggling companies in an effort to prop up the stock markets and keep pensions related to those stocks in profitable territory. So, yes, hyperinflation is unavoidable.
Bitcoin: one more sell-off before halving?
The possibility that miners will have one more sell-off before the halving in order to cash up as much as they can, is a possibility that might make Bitcoin very volatile for the next few months. After that volatile period, the price will go up, hand in hand with the inflationary forces that will be globally present due to the massive bail-out programs having their full effect: rising inflation.
Besides this possible downturn, Bitcoin is currently a bargain and can be picked up to avoid the coming sharp price rises after the halving cuts the mining rewards in two, making Bitcoin like gold: unobtanium.
What is the Bitcoin halving?
Fiat compared to gold and Bitcoin.
One of the weaknesses of traditional fiat money, currencies issued and controlled by central banks is that the central banks can create as much currency as they want. If they create too much, the value of the currency starts dropping.
Bitcoin, in comparison, was created to simulate a commodity like gold. There is only a limited amount of gold in the world. Every gram of gold that is mined, reduces the amount still available for mining, making it harder and harder to extract.
As a result of this limited supply, gold has maintained its value for over six thousand years and is regarded as an international medium of exchange. Satoshi Nakamoto designed Bitcoin to do the same.
Every 4 years the reward that miners receive for adding blocks to the Bitcoin blockchain, is cut in half, a process created by Satoshi Nakamoto to keep Bitcoin's inflation under strict control. Since the supply of Bitcoin is limited to 21,000,000 Bitcoin, reducing the block rewards makes Bitcoin harder to extract, thus more expensive to produce. The result has been a sharp price increase per Bitcoin over several halving events, but this price increase does not necessarily happen right after the halving.
The next halving is around June 2020, and the consensus is that the growing demand for Bitcoin will motivate miners to keep mining Bitcoin, but at higher prices due to stable electricity bills. One argument for miners to keep their mining operations running is that India and Italy and several other countries recently announced that they embrace Bitcoin and will continue to do so.
Bitcoin is considered legal tender in most countries and retail and institutional investors have Bitcoin on their radar. Regulations are being created to protect customers and the architecture is scaling-up, a trend not only happening to Bitcoin, but a general development over several cryptocurrencies including Ethereum with its Ethereum 2.0 project.