At the outset I hope everyone is safe and staying at home. With everything happening around us globally a post on business doesn't feel quite important, but I do have a fiduciary duty.
Our team is working from home, and while business is severely impacted, I wanted to share my perspectives on how cryptocurrencies could evolve out of this pandemic.
What has happened, and what has the impact been on crypto?
The markets have tumbled globally since end of January. While the world was already expecting a recession in 12-18 months, the coronavirus pandemic paralysed both the supply and demand sides in an incredibly short span of time, thereby precipitating some of the steepest falls in stock prices since 2008.
When I was at Morgan Stanley in 2008 it did feel like a slow death of sorts for many institutions. The 2020 crash, however, is a sucker punch. China seems to be bouncing back, so at that rate the world should hopefully limp back on track by end of this year. This is not a structural issue, it is a temporary shock. Any stimulus should be similar to a 'bridge' loan to the system, as the bazookas will be needed later.
Since January 31, Sensex has fallen by over 25 percent, S&P 500 also over 25 percent, and most other stock indices have shown similar downtrends. Gold, however, has risen by around 3 percent in the same period, re-affirming it as a safe haven, or a store of value.
It was anticipated that Bitcoin would behave similar to gold. After all, it has limited supply, can act as a monetary inflation hedge, etc. However, Bitcoin fell by close to 30 percent in this time frame! Similar trend was observed in most other cryptocurrencies (or tokens) as well.
Why did Bitcoin not behave like a safe haven?
While Bitcoin has all the characteristics of a safe haven, it did not behave as such due to the following reasons:
1) Adoption: Gold is owned by central banks, IMF, individuals, investment portfolios, and industries. It used to be a currency standard not too long ago. Bitcoin is owned by far less than 1 percent of the world, and there is no evidence that any major institutions own it yet.
2) Trust: There is a self-fulfilling prophecy around gold being a store of value, and investment professionals switch to gold (and USD, US Treasury) whenever there is risk off. That "trust" is missing for Bitcoin since a lot of it is held by a small number of hands and unless this changes (i.e. adoption) there will always be a risk of volatility, which implies it will be seen as a risky asset.
3) Cash is king: It is not possible yet to use Bitcoin or crypto in buying essentials. In these times it is likely many people will sell out of their Bitcoin to get cash to buy essentials.
4) Derivatives: Last but not the least, there is way too much leveraged investment into crypto derivatives that is not ideal for a nascent market. Given the limited spot market volumes, a squeeze in the derivatives market (as was seen with BitMex) can make the price fall off a cliff. It is unclear how much of the fall can be attributed to this but Bitcoin bounced back 20-30 percent from its bottom once BitMex temporarily shut down (or malfunction) its trading platform.
Long term outlook for bitcoin is still very bullish
The global central bank reaction to the economic impact of the pandemic has been to stimulate the market further with lower interest rates and printing more money. I don't see the point of this as I am not sure what this fixes - demand and supply are both wrecked. In fact, the RBI and the Indian government's response in my opinion is far more reasonable since their actions are aimed at reaching the poor directly rather than attempting to reach them through the banks.
Anyway, all of the stimulus will eventually weaken the currencies (more money chasing same assets implies higher inflation, eroding currency value. Oh, and more debt for future generations to pay off). In such situations, any asset with limited supply, such as Bitcoin, can outperform most other assets. It, however, will require more adoption and more trust.
As I think this will happen sooner or later, I strongly believe that the actions of global central banks will eventually be quite positive for Bitcoin.Prashanth Swaminathan is an alumnus from IIT Guwahati and IIM Calcutta, who spent 10 years in investment banking at Morgan Stanley London. Along with esteemed advisors within this space and crypto, he is currently building a global product called ‘Tandem’ that aims at higher adoption of digital assets.