For years, Bitcoin devotees touted not only the cryptocurrency’s upside but also its value during times of crisis. It is decentralized, borderless, transparent, and immutable, and soared to an all-time high near $20,000 in late 2017. One day, the stock market would collapse, fiat currency would get devalued, and Bitcoin would reign supreme as the ultimate safe haven. The laws of supply and demand would turn this incredibly scarce commodity into a 21st-century alternative to gold.
Fast forward to March 12, 2020. Roiled by the COVID-19 pandemic and the threat of global recession, the stock market nosedived, marking a violent end to the longest bull run of all time. Widespread quantitative easing pumped trillions of dollars of new currency into the global economy, reminding us that fiat currency is more or less unlimited in the age of money printers. The stage was set for Bitcoin to prove its mettle and rocket to new highs, showing itself as the best defense when traditional asset classes fail.
Instead, Bitcoin crashed. On a day that stocks worldwide got hammered, Bitcoin got hit much harder, plummeting 38%, the third-worst day in its history. Ethereum and other cryptocurrencies followed suit, marking a bloodbath for these supposed safe havens.
So what happened? Why did Bitcoin, Ethereum, and their crypto peers crumble at the exact moment when the stage seemed set for them to skyrocket? How did Bitcoin go from above $10,000 just a few weeks ago down to $3700 on March 12 and around $5300 as of March 18? Given all that carnage, can Bitcoin and its crypto pals ever earn back our trust?
Let’s start with a quick lesson on money management in the year 2020. The advent of algorithmic trading means that computers can detect spikes of volatility within the stock market. When those spikes occur, those algorithms will go off, trigger massive bursts of selling, which in turn make the stock market an even more dangerous and volatile place to be. When stock market conditions implode, and an avalanche of selling ensues, that trading can spread to other assets too.
The reason? In times of financial crisis, big-money financial institutions seek liquidity above all else. There’s no careful deliberation about the virtues of one asset vs. another. It’s all just a gigantic flight to cash, powered by a blitzkrieg of algorithmic trading.
Cryptocurrencies got caught in that crossfire. Selling of all financial assets started accelerating, triggering more selling, which triggered margin calls, which triggered rushes to cover those margin calls, triggering panic by investors ending in Bitcoin’s third-biggest one-day loss.
So yes, when panic grips the market, crypto can’t be counted on as a safe haven. The good news is that all the factors that made Bitcoin an attractive asset before its recent tumble remain in place now.
Unlike fiat currency, which lately has started to look infinite, Bitcoin’s supply is limited. That’s because Bitcoin requires mining new blocks of transactions on a distributed ledger called blockchain to come into existence. That mining both authenticates transactions and creates more cryptocurrency, which rewards miners for performing transaction verification tasks. Right now, there is about 18.3 million Bitcoin in existence. The maximum number of Bitcoin that can ever exist is 21 million.
Bitcoin will soon become even more scarce. That’s because May 2020 will bring us a Bitcoin halving event.
A Bitcoin halving is an event that occurs about once every four years (once every 210,000 blocks created, to be precise). Halving cuts the reward for mining new blocks in half, meaning Bitcoin miners receive 50% fewer coins for verifying transactions. Halving will continue on this schedule until the maximum supply of 21 million coins is reached.
The laws of supply and demand are pretty simple: When supply dries up and demand stays constant, prices go up. That means that Bitcoin’s increasing scarcity gives the asset some serious upside potential.
The even better news is that while supply ebbs, demand might not stand still; it may very well begin to surge. Crypto has gradually gained acceptance as it’s risen in price. It’s slowly starting to get targeted as an alternative asset class that institutional money managers can mix into portfolios alongside stocks and bonds. Tech giants like are investing money and resources into either tapping into existing cryptocurrencies or developing their own. Other moves, such as Coinbase’s chief legal officer getting hired to oversee the U.S. national banking system, have recently added to crypto’s expanding acceptance and credibility within the mainstream financial world.
Add in the potential for fiat currency to lose value as government money printers spit out trillions of dollars, and you can see how Bitcoin can entice investors.
Now the bad news. Bitcoin mining was already an expensive, energy-intensive computer calculation well before the halving. Starting last fall, Bitcoin mining firms began buying new, more efficient equipment to squeeze as much profit as they can out of a process that’s going to be 50% less rewarding two months from now. With that, outlay reportedly amounting to half a billion dollars, and the price of Bitcoin getting slammed recently, it might be quite a while until those mining firms recoup their investment.
As things stand, Bitcoin has yet to become widely adopted as a means of payment, which becomes a bigger problem during the COVID-19 quarantine, where people are more focused on buying essential items such as food. Add in the flight to safety to cash by both institutions and individuals, and Bitcoin might not yet be ready for its closeup.
Eventually, though, global health officials will subdue the effects of COVID-19, quarantines will end, and business, as usual, will resume. When that happens, all of the factors working in Bitcoin’s favor will come into focus. Another price boom may very well follow.