Written by Malik Corbett
The COVID-19 pandemic has caused one of the steepest recessions in the history of financial markets. Some believe that we are heading into a financial depression not seen since 1929. Many crypto enthusiasts who believed that Bitcoin was a digital safe haven, quickly realized that their thesis was shattered. Yes, it’s true that BTC was correlated with GLD for over a year. However, assets go in and out of correlation all the time. What is known as a surprious correlation, which is when two assets’ prices behave similarly to each other however there is no causality between the two assets.
This is not to say that bitcoin will not one day become a digital safe haven. To that end, just because BTC is not a safe haven now, does not diminish the importance of bitcoin. In fact, the recent collapse in the legacy markets puts bitcoin and some other tokens such EOS in position as an on/off ramp between various financial systems in the new global order that is forming.
So What Does the Financial Collapse Mean for Crypto?
The COVID-19 pandemic was not the cause of the structural financial problems we find ourselves in today but it pricked and accelerated the inevitable crash, although not many saw the global pandemic that is the proverbial straw which broke the camel’s back. There are some trends to monitor over the next 12 months that could bold very well for the cryptocurrency market.
- The Acceleration of Digital: as most of the world is quarantine apps such as Zoom have benefited. Also payment rails such as PayPal, Cash App and Venmo as people seek other ways to do business without transacting with physical money which many believe can spread the virus. In fact, this is welcoming news for cryptocurrencies as applications such as cryptowallets become easier to use and mainstream.
- Zero and Negative Interest Rates: with interest rates around the world either at zero bound or at negative territory (currently around $12 trillion bonds have negative yield) and no end in sight we are on the verge of a credit collapse. In January we released HekTec One’s 2020 Outlook in which we wrote to investors:
“We are now in an environment where things have been turned upside down; investors have trouble parking their money in interest-bearing assets because there are very few that yield positive returns. So investors are left with putting their money to work in riskier assets.This leads to bubbles in the corporate credit markets which reverberates into the equity market. Low interest is also detrimental to savers because low interest rates penalized them because yields suffer. However borrowers get paid to borrow money. This cycle of savers get penalized and borrowers get paid to borrow continues until it all comes crashing down (usually by some shock to the market). The aggregate leverage ratios increase to unsustainable levels such that a small shock could cause a cascade of defaults.”
There is more pain to come for the legacy markets. However cryptocurrency markets are in a strong position to benefit as institutional investors such as family offices, hedge funds and other investors search for yield and it becomes apparent that public cryptocurrency projects like BTC and EOS are ON/OFF ramps to various financial systems around the world. Which leads to the second trend that could have a dramatic effect on cryptocurrencies.
3. Protectionism: as the COVID-19 pandemic has highlighted, large inequality gaps exist globally but especially in America and that trend will continue especially as we head deeper into the recession. A record 17 million Americans applied for unemployment benefits over the past three weeks and the number is likely to rise as the U.S. continues to grapple with the Coronavirus. The fallout from the coronavirus which is devastating communities across America is that many of these workers will not be able to retain work, even when the virus is brought under control. This will exacerbate the problem and strengthen the pro-protectionism movement that is sweeping not just America but across the globe. In an protectionist environment public cryptocurrencies could prove to be extremely valuable as ON/OFF ramps into US, European and Chinese economic systems.