Bitcoin’s rise from $4,000 at the start of April to $9,000 today has been fueled by a number of factors, including short squeezes, whales pushing the price up, a natural reaction to a prolonged bear market, and more. One aspect that has been briefly touched on but could have a bigger impact going forward is the impact of changes in the world economy that have, some suggest, caused investors to hedge some of their investments into Bitcoin as traditional assets look shakier. We look at what is happening to the world economy and how Bitcoin is impacted.
America’s Garden Not So Rosy
U.S. President Donald Trump may have told attendees at a Florida rally on Tuesday that the American economy is “soaring to incredible new heights”, but that’s not strictly true; U.S. auto sales crashed 6.1% in April, their worst slide in eight years; student loan debt sits at $1.5 trillion; and the federal budget deficit reached $310 billion in March, up 77% from the year before. The Nasdaq has just recovered from a 21% correction, and the Federal Reserve continues to discuss further interest rate hikes.
Now, take into account the uncertainty surrounding Trump’s trade war with China, a country whose talk of continued growth since 2008 is undermined by a massive economic stimulus program that makes up some 20% of its GDP. From that, you can see why the IMF’s lowered its world growth forecast for 2019 and why more and more analysts are warning of an impending global financial crisis.
Where Does Bitcoin Come in?
With all this in mind, can Bitcoin benefit from growing concern over the world economy? Grayscale Investments, the Digital Currency Group-backed cryptocurrency asset manager, certainly thinks so – a study they published yesterday highlights Bitcoin’s potential as a hedge against a looming crisis. The paper praises Bitcoin’s distinct set of properties and suggests that the cryptocurrency should be considered a strategic position within long-term investment portfolios, citing its transparency and immutability, as well as its viability as a source of global liquidity during market disruptions.
The aforementioned has already been illustrated on two occasions by the Cypriot and Greek banking crises of 2013 and 2015 respectively, both of which saw Bitcoin pump in price as residents sought an alternative to sovereign currencies which were becoming quickly illiquid. Also, in the twenty-four hours following the U.K.’s decision to leave the European Union in 2016, Bitcoin was one of the performing assets, with the supposedly stable pound falling 8% against the dollar.
As U.S.-China trade tensions escalate, how does $BTC performance compare to other asset drawdowns?
Read our report: Hedging Global Liquidity Risk with #Bitcoin: https://t.co/4tk2vcYRFW pic.twitter.com/AGxebm3fbb
— Grayscale (@GrayscaleInvest) June 13, 2019
Can Past Performance Predict Future Behaviour?
Of course, we have no way of knowing how much, if any, BTC is being bought up by those wanting a hedge to the potential of a looming liquidity crisis, but it is certainly a theory that cannot be discounted when explaining the recent rise. While we don’t know how Bitcoin will perform in a global financial crisis, it has in the past proved itself a universal currency alternative at times of poor liquidity, and with the world seemingly heading towards a period of financial instability to say the least, it will be interesting to see what happens to the price in the coming months.
