Bitcoin was born 12 years ago, at the height of the last global financial panic, and it was positioned from the beginning as a safe haven to avoid the scam of centralized banking services. Indeed, its creator, Satoshi Nakamoto, published a newspaper headline on its founding block that the British government was preparing to bail out banks for the second time.
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Therefore, it now seems that the crisis is a good test of Satoshi Nakamoto's wonderful currency machine. What is happening to Bitcoin now?
If we evaluate the performance of Bitcoin in the events of the past few days, we can only say that it is not good. Cryptocurrencies including Bitcoin and Ethereum fell in sync with the world stock market. The crypto industry lost $ 26 billion in market value in 24 hours, and almost all cryptocurrencies suffered double-digit percentage declines. The collapse of the crypto market is as bad as the traditional financial world. (Well, maybe not as bad as oil. Today's oil price plummeted by 27% after the Saudi Arabia-Russia oil-reduction alliance broke down.)
Is Satoshi Nakamoto's entire blockchain-based vision just a mirage?
Not necessarily. This is what many economists and industry observers talked to Decrypt today. On the surface, some major cryptocurrencies appear to be as volatile as traditional financial markets. However, there may be reasons to be optimistic. Some people say that the future collapse may be more serious, but as financial markets begin to stabilize, funds will definitely begin to shift to those more legitimate blockchain cryptocurrencies.
The market is in trouble
Most analysts believe that a "safe haven" can mean something that investors can retreat to after a storm, not necessarily during a storm. When this rapid disaster finally subsides, investors will try to close their short positions immediately. As investors big and small liquidate themselves, this will lead to an almost spontaneous hole in all markets.
"During periods of extreme stress, the market is in chaos, the market model is broken, and traders' intuitions are left behind," Matthew Graham, CEO of investment firm Sino Global Capital, told Decrypt.
But he emphasized that the phrase "all correlations tended to coincide during the crisis" was popular during the stock market crash of 1987 and could be explained as: "This does not mean literal truth. Different types of assets are not It's bound to keep pace. "
The maturity of cryptocurrency (meaning that it has been gradually accepted by institutional investors) is making it vulnerable to the same effects as traditional markets in a peculiar way.
Bloomberg Business Editor Joe Wiesenthal tweeted today:
"Once you have" institutional funds, "you really can't expect Bitcoin to behave in a way that is not related to tradition, because at that moment, institutions will sell Bitcoin to raise cash."
He said that for some time, the interconnectedness of Bitcoin with traditional markets has become inevitable because different assets (some assets are rapidly losing value) now share the same group of troubled ordinary owners.
Market hysteria may lead to sell-off
Some people say that they think too much. Digital economist Paolo Tasca said the cryptocurrency sell-off is panic-selling and simple. Compared to retail investors on Main Street, no one really knows how much it has to do with institutional investors.
Tuska, founder and executive director of the University of London's Blockchain Technology Centre, points out that in the UK, as elsewhere, people are hoarding in supermarkets as if preparing for war. At present, the market has introduced rationing, and the price of bactericidal gels on the black market has increased tenfold.
"People don't know what to do, they will panic and draw liquidity from the market. [Bitcoin] is anti-cyclical, so it should behave like a safe haven. But in this brief hysterical mood, it is likely that we You will see a lot of volatility in Bitcoin. The volatility index is high. "
Tasca also noted that in many cases, the fate of crypto companies is directly related to traditional financial markets. In other words, they are not islands.
For example, Ripple's cryptocurrency XRP is used for cross-border transactions and is directly linked to fiat currencies. DeFi applications are usually focused on the peer-to-peer lending market, are supported by stablecoins, and are often pegged to fiat currencies such as the fall of the US dollar.
Mati Greenspan, founder of crypto-analysis site Quantum Economics, said it's no surprise that funds currently deployed in DeFi smart contracts are also declining rapidly.
Total amount of dollars locked in DeFi (Source: Quantum Economics)
Can encryption still be a safe haven?
It is almost certain that things will get worse before they get better. The extent of the coronavirus is unknown. Again, we don't know if it is as deadly as the Spanish flu. For this and many other reasons, in the near future, Tasca and others have stated that getting involved in cryptocurrencies seems like gambling rents will rise.
"Hedge funds may want to reduce their exposure to the cryptocurrency market, which is more volatile than the currency market. During this period, they may prefer the currency market over crypto market products," Tuska said.
Tej Parikh, chief economist of the Association of Directors of Business Leaders and Entrepreneurs in the UK, agrees.
He told Decrypt:
"The global economic shock caused by a corona virus outbreak has shaken investors off volatile stocks. The very real and uncertain impact of the pneumonia epidemic on households and businesses is likely to see financiers buying traditional safe-haven assets. For example, gold and government bonds, and there are concerns about the performance of cryptocurrencies. "
Edward Cartwright, a professor of economics at De Montfort University in Leicester, UK, does not believe cryptocurrencies are a safe haven, but he told Decrypt that cryptocurrencies may now look less risky than other alternatives .
"If cryptocurrencies are seen as assets that can be isolated from the coronavirus shock and the almost inevitable slowdown of the world economy, their prices will rise. But if they are seen as a kind of period of uncertainty Risks that can be avoided, then their prices will fall. There is evidence that the recession has made investors reluctant to take risks. Therefore, I do not want to move to cryptocurrencies. But again, I don't think there is any reason for the price to fall significantly. "
But some people say that once things settle down, cryptocurrencies can become a safe haven. We may have entered a transition period when Bitcoin defines an asset class that behaves like a hybrid of tech stocks and gold.
VanEck / MVIS CEO and digital asset strategist Gabor Gurbacs tweeted: "I found this to be an insightful observation, especially in the days of the broader market sell-off, where Bitcoin is driven by technology stocks to avoid it than gold. The increase was driven by insurance transactions. "
"It's natural to see huge fluctuations during difficult times," Graham said, noting that he was pleased to see Bitcoin and Ethereum perform in a crisis. But he said that if BTC fell below $ 6,000, it would have "unhealthy consequences".
"Because BTC and ETH are still higher than their lows at the end of last year, at this point we can only see one maturing asset class that is increasingly integrated with the rest of the financial world."
Even Tasca is a bit bullish. He says:
"Overall, I think Bitcoin is still a safe haven. I have no reason to believe that it is not. There is no sign of entering a bear market or the market will collapse in 2020."
When cryptocurrencies are hit
Tasca said that the turbulence in the energy market may affect mining costs and may increase the degree of centralization of the mining pool to maintain business profitability. But there are indications that, although there may be very difficult times in the future, the development of Bitcoin will continue.
Joseph Lubin, CEO of Ethereum co-founder and Brooklyn-based incubator (funded by Decrypt) ConsenSys, said this week that he should relax. In many ways, this is just another day in many days of cryptocurrency history.
"The best way to express it is when all bad things happen, all correlation coefficients become 1 or -1."
This article has been authorized for translation by Decrypt .