How #Covid19 Compares to #GFC08

Why digital assets might drive the recovery, and how it will define Bitcoin’s legacy.

It is the legendary initial chapter of BTC lore. The first published transaction of this new economic paradigm emerged from the ashes of the collapse of Wall Street its ripple effect around the world.

Let’s look at how the rise of digital currencies in the decade since the great recession might actually play a significant role in the recovery of global markets this time around.

The Genesis Block

On January 3, 2009 the first murmur of the Bitcoin network was broadcast. Its founder placed a subtle but pertinent message in the first transaction, known as the genesis block (first block of the blockchain).

“Chancellor on Brink of Second Bailout for Banks”.

This title of the English newspaper (in Featured Image) was quoted and embedded into the first transaction for two reasons.

1. Poetically, it shows clear intent for the need for a new financial model in the shadow of the legacy system failing.

2. Practically, it serves as a timestamp to prove that the blockchain transaction actually took place on or after January 3, 2009 — as Satoshi would not be able to predict the headline in advance of this date. This is an important marker given the perpetuity of this, at the time, new technology.

So why this important? Won’t digital markets just mirror traditional markets? Not necessarily.

I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this cycle. My impression is that future generations will look back on this moment and say “… and this is where they completely lost their minds.”

John Hussman, Hussman Funds — January 29, 2018

Well, despite the monumental crash on Friday 13/03/2020 Bitcoin and the associated digital altcoin markets have been a remarkable success since inception.

Wild volatility has been underpinned by incredible growth which is underscored by the fact institutional futures markets such as CME are now offering BTC products.

But if we go back to the top of the post, and look at the raison d’être of Bitcoin, coupled with the fact that digital assets markets have had over 10 years to mature and prepare for this exact moment, we begin to realise that right now might be the best time to enter this space in a very long time.

Bitcoin has never existed during any form of global financial turmoil so there are zero data points to predict how it will perform in a wider economic environment of such uncertainty.

At this point Bitcoin has ostensibly been a success, however, how the markets react from this point will determine the framework of that success. Will it be the most successful financial social experiment in history? or will it evolve beyond this point and become a genuine financial instrument to supplement traditional markets?

This is the $21,000,000 question — if this is the situation that Bitcoin was designed for, is it ready to fulfil its purpose?

If digital assets were to drive this recovery, how would it work?

First, let’s look at some commentary about some predicted ways this uncoupling (the de-correlation) from traditional markets might happen.

Speaking on the What Bitcoin Did podcast on Jan. 3, the impact of a recession type event and how that would initially impact digital markets — Andreas Antonopoulos spoke with clear-eyed rationalism.

“What most people don’t realize I think is that in the beginning at least, crypto will crash hard.

And the reason it will crash hard is because a lot of the venture capital, corporate investments and private investment from individuals that is based on cheap money and disposable income and excess cash in portfolios etc., like in any other part of the economy, will dry up.”

Antonopolous went on to explain that Bitcoin required $18M USD in capital a day during January to maintain price parity and if the liquidity dried up, the price would plummet. The logic for this figure is that roughly 144 blocks are mined per day, and the current reward for each block is 12.5BTC.

So, 144 x 12.5 = 1800BTC

1800BTC x 10,000USD (the hovering price of BTC in January) = $18M USD

While this prediction has proved to be prophetic, the way that Bitcoin immediately bounced from its bottom of $3637 to above $5200 in minutes has given cause for optimism for digital asset commentators.

One of those was Bitcoin and Decred on-chain analyst “Checkmate” who outlined why many believe that a Bitcoin rally might decouple from the performance of the traditional markets.

The thinking goes that BTC still has buyers (evidenced by the bounce), has a core of investors who will not sell (HODLers), has a finite supply, and is not a system inherently based on debt.

Like clockwork, the Fed announced on Thursday that they were to inject $1.5 Trillion into the market as a form of “quantitative easing” to avoid “unusual disruptions” in the markets. Moves like these only further dilute the USD and this naturally leads to increased value for BTC, which of course has a mathematically finite supply. Because of this Bitcoin is joining gold as a legitimate inflation hedge.

Other commentators spoke of ‘buying more blood’ and speculating where the money might head after the dust settles.

With the spread of Covid19 showing no signs of slowing down with obvious economic handbrakes such as prolonged quarantine periods, consumer deflation, disruption of trade only just beginning to manifest — to quote the scarecrow from A Wizard of Oz, “of course I don’t know but I think it will get darker before it gets lighter.”

One of the best papers on this topic (or near enough) was penned last August by Bitcoin core engineer James O’Beirne titled “Bitcoin for Safety.” If you haven’t read it, you absolutely should.

When discussing Bitcoin as a viable investment as an alternative to the economic turmoil and governance seen in traditional economic policy in the last decade he said;

Bitcoin is designed, intentionally or incidentally, as a near ideal tool to have access to when this level of turmoil hits global markets, when governments start to engage in never-before-seen monetary experimentation, when Treasury departments and other political institutions start to lose their credibility.

If the title of this paper is not obvious enough, I think this logic is sound enough to suggest at least some cogency of why it is entirely possible that Bitcoin will decouple from the New York Stock Exchange.

Give it to me straight

I don’t think I can summarise better than Mr. Pomp himself in his excellent recent letter to investors;

What happens to bitcoin over the next few months/years? This is where I get really excited. I get excited because bitcoin was built for this scenario. It is the hardest money the world has ever seen. It is provably scarce. It is difficult and expensive to produce. And the monetary policy is programmatic and transparent. These things are important for any asset, but they become exponentially more important when we enter times like we are about to enter.

He continues;

I can’t believe we are getting the opportunity to live through this period in time. Thankfully, we have a parachute with us this time around.

Anthony Pompliano, March 12, 2020

While such widespread economic uncertainty is terrifying, remember that the genesis block and by extension the largest BTC holders see macro risk as to the very reason for Bitcoin’s existence.

With all this in mind, be safe, and make sure you pack your parachute accordingly.

(Disclaimer: Dion is a consultant at Mine Digital)