Why Can Bitcoin Beat an Approaching Financial Crisis?

Why Can Bitcoin Beat an Approaching Financial Crisis?


As institutions line up to buy Bitcoin, their origin story comes into focus. Most argue that Bitcoin was created in response to the Lehman Brothers bankruptcy and the ensuing global financial crisis. However, it is the result of decades of work on peer payments. As prices are driven by influx and volatility in the spot and derivatives markets, many investors and traders are in it just to make a profit. However, Bitcoin maximalists and some network analysts believe it can emerge as a successful alternative currency.

It is interesting how the altcoins' narrative is centred on being alternatives to Bitcoin when it alone is being considered an alternative currency. Regardless of whether Bitcoin faces the economic crisis or not, it is important that retail traders find out before adding more of this asset to their portfolio. Smart money can come out faster than it did, but retailers need to test it out.

The current growth of the economy's assets is far from the Fed's growth. Except for the NASDAQ that comes closest, throughout the period, other assets cannot keep up with the Federal Reserve.

source: ecoinometrics.com

Based on the year-to-date growth in assets, the Fed's balance sheet surpasses everything. Bitcoin's performance is the closest, followed closely by NASDAQ. Currently, Bitcoin inflation is at 1.8% and the Fed's ideal target is 2%. The Fed sees it as the ideal level of inflation to maintain a healthy economy for years. While the Federal Reserve achieves this by manipulating monetary policy, Bitcoin's inflation rate mimics gold's stable inflation rate, making it more reliable.

Although it may seem counterintuitive at first, Bitcoin is a deflationary currency. Comparing it to fiat currency makes it ideal protection against inflation. According to This Time is Different, by Reinhart and Rogoff, governments have been inflating the currency for the past 800 years. Originally, governments would inflate the currency by degrading gold coins. Then they moved on to the printers and started to inflate the money base by creating money digitally and tracking it through databases. Given this, Bitcoin is not entirely different from fiat currency, except that the price is controlled by demand and supply, and not by monetary policies.

Bitcoin's correlation with Gold and the S&P 500 is greater than at the beginning of the year. The correlation over a period of 1 year is still negative or close to zero; however, over the past 10 months, it has steadily increased. Bitcoin's ROI is the highest.

source: ecoinometrics.com

Since 2015, Bitcoin has surpassed the top 5 indices by 70 times, although ROI growth this year is not as explosive, high ROI is not the only factor in overcoming the next financial crisis. Bitcoin's exchange-traded volume is currently less than the $550 million peaks reached in July 2020.

source: blockchain.com

However, the current drop in volume is essential to create shortages and increase demand. Along with the drop in the volume of trade, the inflow to the exchange rate fell below the 180-day average and began to rise only last week. As institutions boost open interest in derivatives exchanges, Bitcoin's fundamentals are stronger now. It may be enough to face the next financial crisis. While the price of Bitcoin may rise, the same is not true for altcoins and a financial crisis could cause the value of those with low market capitalization to fall below its lowest price.

source: eng.ambcrypto.com