Despite global turmoil in financial markets this year, Bitcoins price has offset traditional market risk, growing +5.68% year to date. Coronavirus was arguably one of the largest tests for Bitcoin thus far. With an early liquidity crisis in financial markets, it’s worth noting the stability Bitcoins price has experienced. When measuring yearly performance, Bitcoins price has surged +35% the last 1 year. Bitcoin is passing a huge milestone that many critics believed would never happen.
During the historic bull market in stocks, it was difficult to assess whether or not Bitcoin would thrive in an environment that it was ultimately created for. The last 10 years have witnessed significant upside in traditional markets. The Dow Jones for example has grown +170% since 2008. The last decade was fueled by low interest rates. In addition, the market was highly levered, which essentially pushed up stock prices and company valuations.
During this time Bitcoin was making headlines as well. Still to date, Bitcoin has been the best performing asset class. The last decade, Bitcoins price has surged +9,300,000%. Yes that’s right, nearly 9.3M%. Taking this into perspective, a $100 investment in Bitcoin 10 years ago would be worth north of $9M.
Figure below: Difference between Bitcoin performance compared to some of the largest and most successful companies in the world.
Bitcoin Skeptics Were Early Bashers
The performance Bitcoin has experienced the last decade is beyond believable. This is the very reason so many skeptics have shared their opinions. Many of these critics originally came from Wall Street atmospheres, where Bitcoin like returns have never been seen. Some of the early disbelievers included:
Jamie Dimon – CEO of JP Morgan Chase. Jamie called Bitcoin a scam multiple times over the past few years. Also stating it was “worse than tulip bulbs.” Later on, it was reported that JP Morgan was launching JP Morgan Coin.
Bill Harris – Former CEO of Paypal. Bill stated that Bitcoin was “a colossal pump-and-dump scheme, the likes of which the world has never seen.”
Warren Buffet – One of the world’s most profound investors. Once called Bitcoin “rat poison.”
As discussed above, it’s worth noting that the investors above come from traditional finance. Bitcoins growth metrics have been fueled through its infrastructure. With Bitcoin operating on a “set supply,” it’s really introduced a completely different asset to the market. The individuals above come from industries where supply and monetary inflation have corroded the markets. In stocks, supply structures are manipulated everyday through forward and reverse splits. On the monetary side, the Federal Reserve has continued to print trillions of dollars to meet their debt obligations. This measure has ultimately killed purchasing power for a single dollar. This behavior has discounted the basic values behind traditional “supply vs demand.” If an entity like the Federal Reserve can have “unlimited supply,” then many people ask what the value of money really is.
Bitcoin Has Changed This Narrative
With Bitcoin operating under a set supply, and eventual “deflationary model,” it’s created a whole new ball game. Since precious metals, Bitcoin is arguably the 2nd asset class that has allowed traditional “supply vs demand” economics to operate naturally. With Bitcoin operating in a “decentralized manner,” there’s no central party controlling its issuance. Bitcoins price has experienced drastic growth due to “supply vs demand” infrastructure. As demand and use cases grow for Bitcoin, its 21 million supply will become more and more scarce. Could we imagine what the price of Amazon stock would be right now if they only had 21 million shares outstanding? At a $1 trillion dollar valuation, their stock would be trading at $47,000/share right now if they only had 21 million shares outstanding..
Over the last year, oil volatility is nearly 7x higher than Bitcoin. Critics argue about the volatility that exists with Bitcoin from an investment perspective, but what about the billions of retail money that is invested in oil exchange traded funds? Bitcoin still has higher volatility than most traditional asset classes, but this is expected. This again goes back to the supply structure. With only 18.3M+ Bitcoins being in actual existence right now, volatility will continue to exist until Bitcoin is closer to full deployment. This is no different than a “low float” asset. If you have less supply and growing demand, volatility will be involved. This is also the very reason Bitcoins price saw a drastic run to peak levels of $20,089 in 2017. Demand and “FOMO” were catalysts that drove Bitcoin price to those levels. Again, we can further see how different an asset can perform when you let traditional “supply vs demand” operate in a natural way.
Studying Bitcoin Price Action When It Matters
What we learned the last decade is that Bitcoins price:
Thrived during a traditional bull market – As discussed above, the stock market had a historic run since 2008. The Dow Jones rallied +170% and Bitcoin grew +9,300,000%. This tends to be correlated to “risk appetite.” In an environment where investors are doing well, they tend to take more risk in the form of allocating to “risker and more volatile” assets like Bitcoin. Back in December of 2019, Bank of America labeled Bitcoin as the best performing asset of the decade.
Outperformed while acting as a hedge – The most fascinating thing about Bitcoin is that it was able to outperform, and also experience uncorrelated characteristics during market turmoil prior to COVID-19. This isn’t seen in traditional markets. Assets like Gold have historically hedged market uncertainties, but it’s never had the same effect that Bitcoins had in terms of a performer and “hedger.” Scenarios like the “trade-war” were perfect examples of Bitcoins non-correlation. If we go back to 2019, traditional markets got very shaky with on-going tariff disputes between China and the United States. Consequently, traditional markets sold off while Bitcoin was rallying and experiencing capital inflow. According to a report by SFOX, Bitcoins price nearly had a perfect negative correlation to the S&P 500 in May of 2019. We saw similar price action last year during other economical events as well. During a time when the Federal Reserve was reducing interest rates, Bitcoins price surged as investors believed that reduced rates were evidence of a slowing economy.
Isn’t as volatile as some suspected – Bitcoin has surely been volatile, but let’s compare it to oil markets, an asset class that many investors have heavily diversified in. During Coronavirus, Oil briefly went into negative pricing due to lack of demand. Many analysts tout the Bitcoin volatility, but when was the last time Bitcoin was negative? ( the answer is never ). The magnitude of oil going into negative territories is of epic proportion. We aren’t talking about a small industry by any means. Towards the end of 2019, Oil markets were valued at about $1.7 trillion per year. In context, the annual market size of oil is larger than the annual market size of Gold, Iron, Copper, Aluminum, Zinc, Nickel, and Silver combined.
Passing the hardest test yet – With Bitcoin thriving in a bull market, many argued it hadn’t been tested yet. With 26 million + Americans currently unemployed, the Coronavirus outbreak has been one of the most catastrophic events the economy has ever faced. During this time, banks faced a liquidity crisis in which investors rushed to the exit gates. During a liquidity crisis, even hedge assets like Gold struggle since they’re very liquid. Bitcoin is a liquid market as well, and even saw early sell-offs.
Coronavirus is not over by any means, but Bitcoin has passed a milestone test so far. Despite global sell-offs, Bitcoin is still +5.68% year to date. On a yearly basis, Bitcoins price has seen +35% growth. Over the last year, Bitcoin has been the most effective way to “de-risk” investment portfolios. Investors that allocated BTC the last year are outperforming the market. Bitcoin has definitely been more correlated to traditional markets than ever before, but the fact it’s stayed afloat is a milestone. With Bitcoin operating as a “currency” that can be commingled with economies across the globe, investors are starting to see the real value behind Bitcoin. Many investors have been waiting to see how Bitcoin would do during global chaos. Despite the gruesome environment COVID-19 has caused, it could very well be the best thing that ever happened to Bitcoin.
With economies like the United States needing to print trillions out of thin air to stay afloat, many investors start to worry about currency devaluation. We’ve already seen failing economies like Venezuela and Zimbabwe flock to Bitcoin as hyperinflation has essentially destroyed their reserve currencies. As the U.S continues to create trillions, many start to question inflation and the implications that could have on an economy that has $20+ trillion in deficit, and an economy that operates on 120%+ debt to gdp.
Bitcoins resilience during Coronavirus is a milestone in the making if it can maintain growth during market turmoil. This event could surely inject a lot more interest around the asset class going into its third “halving.” Even if the United States continues to ignore its presence, many other economies have gotten hit even worse during COVID-19. Due to lack of financial resources, it’s suspected that other countries could allocate more attention to digital assets before the United States.
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