The Looming Financial Crisis: What Will Happen To Bitcoin?

You may have noticed that I have been MIA for the past few weeks, but fear not, I am still hanging around (although very busy!) and have been involved in the Cryptocurrency space as much as ever. In the midst of the (the economic downturn during the late 2000s and early 2010s), released the now-famous paper, proposed Great Recession Satoshi Nakamoto ‘ Bitcoin: A Peer-to-Peer Electronic Cash System’ . Satoshi ‘a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution ’. It is widely accepted that was (centralized financial institutions, bank bail-outs, etc.) which led to the inception of (in 2008) with its networking ‘going live’ on 3rd of January in 2009. The first block (genesis block) included the following message taking aim at who was preparing a for UK Banks. Satoshi unhappy with the economic situation at the time Bitcoin ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’, Alistair Darling £500Bn rescue package In this post, I won’t only talk about and (as I have done previously) but take a step back and dive deeper into , the and discuss what could happen to when they face the first financial crisis since their birth. In a follow-up post, I will discuss what will happen to Cryptocurrencies, as a whole, in such event. Bitcoin Cryptocurrencies global economics looming financial crisis Bitcoin What is a Financial Crisis and how is it caused? In a financial crisis, asset prices see a steep decline in value, businesses and consumers are unable to pay their debts and financial institutions experience liquidity shortages. A financial crisis is often associated with a panic or a where investors sell off assets or withdraw money from savings accounts because they fear that the value of those assets will drop if they remain in a financial institution. bank run A financial crisis can occur if institutions or assets are overvalued, and it can be exacerbated by irrational investor behavior. A rapid string of selloffs can further result in lower asset prices or more savings withdrawals. If left unchecked, a crisis can cause an economy to go into a recession or depression. It’s human nature to and the capitalistic nature of our economy is built in such way that to facilitate this , more often than not, we keep . This happens more-so during a ‘euphoric market’, in which retail and institutions often . always strive for more constant growth piling on debt overestimate their ability to pay back their loans A market crash, and subsequently a financial crisis, occurs when piling on this debt is and everything comes crumbling down like a house of cards. no longer sustainable There are many resources out there on this subject, so I won’t go into further details but rather focus on how Bitcoin will reach once the next financial crisis hits — and it’s a matter of when, not if. Research Data In order to back this post with facts, I would like to list below the different assets, used in the charts that follow, alongside a brief description and the reason behind their selection. The assets (XAUUSD, Blue) GOLD price is widely followed in financial markets around the world. Gold was the basis of economic capitalism for hundreds of years until the repeal of the Gold standard, which led to the expansion of a fiat currency system in which paper money doesn’t have an implied backing with any physical form of monetization. Gold quoted in US Dollars, which is the common yardstick for measuring the value of Gold across the world. Gold Besides the fact that Bitcoin has been numerous times called ‘digital gold’, gold is vastly considered a safe heaven during economic turmoil. It usually has an inverse correlation against the United States Dollar (USD) and is an excellent asset to track. (SPX, Orange) Standard & Poor’s 500 Index Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period. The Standard & Poor’s 500 Index (S&P 500) is the most commonly used benchmark for determining the state of the overall (US) economy and makes perfect sense to be included in any performance comparison chart. (AUDUSD, Cyan) Australian Dollar vs United States Dollar The currency pair tells indicating how many Australian Dollars (the quote currency) are needed to purchase one United States dollar (the base currency) This ‘major pair’ is good comparison candidate due to the fact that during a euphoric market, ‘risky currency trades’ do well, as they usually have higher interest rates (which implies higher growth) and are directly linked to commodities. Australia is the largest coal and iron ore exporter, and therefore the . ‘plight of its currency is heavily dependent on commodity prices’ (VWO, Brown) VanGuard FTSE Emerging Markets ETF This ETF invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa. It has high potential for growth, but also high risk; share value may swing up and down more than that of stock funds that invest in developed countries, including the United States. (TLT, Green) iShares 20+ Year Treasury Bond ETF This ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. Generally speaking, bonds are a ‘safe play’ during recession as whereas . However, not all bonds are made equal. The ‘safe play’ applies to bonds with a good credit rating, such as, Triple-AAA Corporate Bonds. This consists of U.S Treasury Bonds which have a very good credit rating. interest rates decrease bonds value rise ETF The charts The 3 charts below (with different timeframes), show a snapshot of the over a period of years which I will be referring to in the following sections. asset percentage change Figure A Figure B Figure C So… What will happen to Bitcoin? Scenario 1 During a ‘euphoric market’, retail and institutions are , investing in assets that have a . As shown in , high(er) risk assets, such as the and the , saw great returns. You may have also noticed that , also had similar returns, and this was partly due to the . more risk-seeking higher yield potential Figure A VanGuard FTSE Emerging Markets ETF Australian Dollar gold ‘Commodities Supercycle’ However, there’s no doubt that the investments to are the ones that ; institutions and retail both require cash-flow during a financial crisis and the most logical investments to get sold are the highest risk ones. Alternatively, they might seek to minimize risk by investing into ‘safer’ investments, such as, the , , etc. first get liquidated carry the highest risk iShares 20+ Year Treasury Bond ETF Gold In & , you can clearly see that the assets that got hit hardest during the economic turmoil, were the riskier ones. The and taking a (from their all-time-high between 2006 and March 2009). In comparison, ‘safer assets’ took a hit of ~30%. Figure B C VanGuard FTSE Emerging Markets ETF Australian Dollar ~80% hit Now that’s out of the way, it would come as no surprise that Bitcoin could get into trouble during a financial crisis, as it can be considered a , due to: high risk investment — Bitcoin has only been around for nearly 10 years and still remains a that is purely driven by supply and demand. The only reason why Bitcoin holds value today, is because of the and . Market Risk highly speculative asset growth expectation possible future real use cases — As Bitcoin is a step away from the ‘traditional financial system’ and has the ability to be (more efficiently) used for nefarious purposes, governments agencies have been trying to find a way to it. However, due to the nature of Bitcoin, this has proved to be and the ‘ Regulatory Risk regulate extremely hard the lack of uniform regulations about bitcoins (and other virtual currency) raises questions over their longevity, liquidity and universality.’ — Given the nature of the blockchain, where all transactions are and , security is a great risk. Once Bitcoins have been transferred from Party A to Party B, the only way for have them returned back, is for Party B to them. Since Bitcoin-related activities (wallets, exchanges, etc.) live in the , they are open to , and For example, once a malicious actor gains necessary access on an exchange to illegally transfer Bitcoins from the exchange to his own wallet, there’s such action. There have been number of exchange hacks, most notably, the , which led to losses in excess of at the time. Security Risk final irreversible explicitly refund digital world hackers malware operational errors . no way to reverse Mt. Gox hack in 2014 $450 million — Depending on jurisdiction, some through a number of schemes, such as the or the . Most exchanges (and accounts) and are mostly self-insured. Insurance Risk traditional investments are insured Securities Investor Protection Corporation (US), the Federal Deposit Insurance Corporation (US) Financial Services Compensation Scheme (UK) do not have such federal/government protection — Since Bitcoin is pseudonymous and has a low entry barrier, it carries a . Scammers and fraudsters have a much easier time selling ‘false’ Bitcoins, in comparison to, a bond or a stock. Fraud Risk larger risk of being used fraudulently Scenario 2 Gold has long been considered a ‘safer asset’ during times of economic turmoil and this can be proven by the charts above. Gold took a hit of during , in comparison with other assets that took losses of . ‘just’ 30% The Great Recession over 80% Bitcoin has been long-called ‘digital gold’, for a number of reasons. Although Bitcoin set out to become a ‘digital currency’, it also performs exceptionally well as a store of value. It shares a number of characteristics with gold, such as: —It’s quite hard to gauge how much gold is in circulation and what the total supply could be, but there’s no denying that . Similarly, there (as of today, we’ve minted ~17.5M Bitcoins). Scarcity gold is scarce can ever be 21M Bitcoins minted — Although gold can wear slightly if not handled properly, both and Bitcoin are . Gold doesn’t and Bitcoin can’t be , even if the . They can both stand the test of time with no impact to their composition. Durability gold extremely durable rust nor corrode destroyed nor altered internet was to disappear — One ounce of Gold will always be equal to another ounce of gold (given the same purity) and similarly one bitcoin is always equal to another bitcoin. Fungibility The property of a good or a commodity whose individual units are essentially interchangeable. In addition, Bitcoin has (even better) properties, that gold doesn’t. These include: — Bitcoin is digital, gold is physical. Storing Bitcoin is , whereas, storing gold isn’t as straight forward (nor safe). Many gold investors use third-party vaults, bringing and . In addition, carrying gold along is quite inconvenient as it has some fixed allowance limits and also creates high possibilities of theft. On the contrary, Bitcoin is stored in a and has . Digital wallets can easily be restored using a , in the event they are no longer accessible (i.e. new phone). Storage extremely easy cost risk digital wallet no physical space requirement seed phrase —This comes down to how securely an individual stores his gold (physically) or Bitcoin (digitally). Obviously, it’s much and that’s why third-parties are often involved in gold storage, which brings greater risk. Security easier to securely store Bitcoin than gold — Bitcoin can be ‘carried around’ much easier than gold. Gold is to carry around (fixed allowance limits) but also comes with a . On the other hand, Bitcoin can be carried around with just your phone. Portability brings a host of other benefits, which I will discuss below. Portable inconvenient greater risk of theft —Although gold be divided, it nor in a highly precise manner. On the other hand, Bitcoin can easily be divided down to (with possibility for more). Divisible can can’t be divided easily 8 decimal places —As noted above, Bitcoin set out to be a ‘digital currency’ and can still perform pretty well as such (despite a few technical limitations which are being worked on). Although gold can be traded electronically (exchanges, etc.) it as you can’t just rock up to a grocery shop and pay with gold, whereas, you could easily do that with Bitcoin (given necessary framework is in place). Method of Payment can’t really be considered a currency — Although, in theory, gold is scarce, there is a possibility, that (undiscovered gold deposits, meteor mining, etc.). On the other hand, Bitcoin will period. Finite Supply more gold can be mined only ever have 21M coins minted, Having the above in mind, one could argue that, Bitcoin could perform, as well as, or even better than gold once we get into murky waters. Where does all this leave us? In my opinion, there are two very important factors that will determine which scenario will play out once this financial crisis hits — and . At this point in time, neither of these seem to be adequate, so I’m inclined towards the first scenario unfolding once the economic turmoil hits. liquidity investor confidence Having said that, there are major developments in the Cryptocurrency space (and Bitcoin in particular), such as, the , , (for individuals and institutions) and more. If most/all of these developments are in place once the next recession hits, I believe Bitcoin will thrive. Bakkt launch V anEck/SolidX Bitcoin ETF Proposal well-defined regulation How many claps does this post deserve? How about a follow? If you enjoyed this post, please feel free to 👏 👏 many times (you know you want to!), give my blog a 👣 👣 and 🤲 🤲 with your friends. There’s a limit of 👏 👏 you can give to each post, so I urge you not to try and exceed that limit… you might break Medium! clap follow share 50 claps Speaking of which… If I still have your attention, please leave a comment and let me know what else you would like to see me writing about. You can find links to my social media and sign up to my newsletter below. contact@ermos.io You can also show your support by donating to the following address:**ETH**: 0x4c7195E074cf0Ab6F77Bdb7C97Fd2567066Bb712 . Disclaimer: All information and data on this blog post is for informational purposes only. My opinions are my own. 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