After the outbreak of novel coronavirus in Italy, Iran and South Korea, as investors began to realize the potential economic impact of this global infectious disease, the global market fell into chaos.
The global stock market has experienced its worst week since the 2008 global financial crisis. US Treasuries rose and yields plunged. Traditional safe haven currencies such as the yen and the Swiss franc have also been targeted as investors want to protect themselves from market turmoil.
Bitcoin is not immune. However, although bitcoin and other safe haven assets did fall last week, the characteristics of bitcoin as a safe haven asset have not expired.
Bitcoin is not a hedge against recession. Similar to gold, which is also used for speculative purposes in the short term, the liquidity squeeze experienced last week may lead investors to sell bitcoin to address the liquidity constraints of their other portfolios. Bitcoin should not be expected to maintain its value steadily under severe market pressure. Last week’s performance is not surprising. The same was true of gold during the 2008 financial crisis.
On the contrary, bitcoin is a precaution against legal currency. Bitcoin is not to prevent the slowdown of economic growth, but the mismanagement of the legal currency system. What we need to pay attention to is not the performance of bitcoin when the market declines due to the panic caused by novel coronavirus, but the performance of bitcoin in response to the stimulus policies launched by the central bank to mitigate the economic impact of the virus.
So far, although bitcoin has not been able to respond to the central bank’s stimulus, the upcoming Central Bank stimulus may prove very different. In order to deal with the novel coronavirus, the central banks of the group of seven seem to be ready to take the first joint action since 2011（ https://www.bloomberg.com/news/arTIcles/2020-02-28/a-brief-history-of-central-bank-coordinaTIon-as-debate-heats-up ）。 Although many economists believe that the potential economic impact of the virus cannot be mitigated through monetary policy, the market now expects the Federal Reserve to cut interest rates by 50 basis points at the upcoming meeting on March 18. If the Federal Reserve decides to act quickly, the interest rate cut may be implemented soon.
The market value of bitcoin is too small to make a real response to such important monetary policies as the third round of quantitative easing in 2012.
With a market value of $160billion, it may still be too small to be a real choice for investors to protect themselves. But maybe it’s different this time. Contrary to the previous monetary stimulus, the approach to be taken may be more important than the policy since the third round of quantitative easing and produce greater market response. Now the institution has entered the market and bitcoin is ready.
Responsible editor: CT