45s – 1min Intro
What will happen to Bitcoin during the next financial.
In this video I won’t only talk about Bitcoin and Crypto, but I will take a step back and
also talk about global economics and the next financial crisis. What will happen to Bitcoin
during the next financial crisis. This will be the first financial crisis that Bitcoin
will endure. If you have bought Bitcoin recently or in
the last few years or you are thinking about buying Bitcoin then you need to watch this
video to see how a financial can impact your investment. This looming financial crisis
will affect a lot of people. Since i do not want to waste your time I will
post timestamps to the key parts in the video in the description below. First we need to go back in time a little
bit, ten years to be exact, to the Great Recession, the economic downturn in the late 2000s and
early 2010. That was when Satoshi Nakamoto released the famous Whitepaper: Bitcoin: A
Peer-to-Peer Electronic Cash System. This idea of his would allow online payments to
be sent from one person to another without anyone in between. No third party such as
a financial institution. Many people believe that Satoshi was not happy
with the economic situation at the time. How the centralized financial insitutions operated,
the bank bailouts and so on. At the time Alistair Darling was preparing a 500billion pounds
rescue package for UK Banks. The Bitcoin network went live on the 3 of January 2009. During a financial crisis asset prices decline
in value, businesses and consumers are unable to pay their debts. Very often a fincancial
crisis is associated with a lot of fear or a bank run.
In a financial crisis, asset prices see a steep decline in value, businesses and consumers
are unable to pay their debts and financial institutions experience liquidity shortages.
A financial crisis is often associated with a panic or a bank run where investors sell
off assets or withdraw money from savings accounts because they fear that the value
of those assets will drop if they remain in a financial institution.
A financial crisis can occur if institutions or assets are overvalued, and it can be exacerbated
by irrational investor behavior. A rapid string of selloffs can further result in lower asset
prices or more savings withdrawals. If left unchecked, a crisis can cause an economy to
go into a recession or depression. Humans always want to strive for more and
are quite capitalistic in nature and our economy makes this constant growth easy.
I think before we look at two scenarios that can happen to Bitcoin during the next financial
crisis it is important that we look at a few other asset classes and see what happens to
them during a crisis. Let’s start with Gold.
The assets GOLD (XAUUSD, Blue)
Gold price is widely followed in financial markets around the world.
Gold was the basis of economic capitalism for hundreds of years until the repeal of
the Gold standard, which led to the expansion of a fiat currency system in which paper money
doesn’t have an implied backing with any physical form of monetization. Gold quoted
in US Dollars is the common method for measuring the value of Gold across the world.
Gold has stood the test of time in being a safe heaven during economic turmoil.
It usually has an inverse correlation against the United States Dollar (USD) and is an excellent
asset to track. Standard & Poor’s 500 Index (SPX, Orange)
Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed
to measure performance of the broad domestic economy through changes in the aggregate market
value of 500 stocks representing all major industries. The index was developed with a
base level of 10 for the 1941–43 base period. The Standard & Poor’s 500 Index (S&P 500)
is the most commonly used benchmark for determining the state of the overall (US) economy and
makes perfect sense to be included in any performance comparison chart. 339% growth since the last recession
Australian Dollar vs United States Dollar (AUDUSD, Cyan)
The currency pair tells indicating how many Australian Dollars (the quote currency) are
needed to purchase one United States dollar (the base currency)
This ‘major pair’ is good comparison candidate due to the fact that during a euphoric market,
‘risky currency trades’ do well, as they usually have higher interest rates (which
implies higher growth) and are directly linked to commodities. Australia is the largest coal
and iron ore exporter, and therefore the ‘plight of its currency is heavily dependent on commodity
prices’. VanGuard FTSE Emerging Markets ETF (VWO, Brown)
This ETF invests in stocks of companies located in emerging markets around the world, such
as China, Brazil, Taiwan, and South Africa. It has high potential for growth, but also
high risk; share value may swing up and down more than that of stock funds that invest
in developed countries, including the United States.
iShares 20+ Year Treasury Bond ETF (TLT, Green) This ETF seeks to track the investment results
of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty
years. Generally speaking, bonds are a ‘safe play’
during recession as interest rates decrease whereas bonds value rise. However, not all
bonds are made equal. The ‘safe play’ applies to bonds with a good credit rating,
such as, Triple-AAA Corporate Bonds. This ETF consists of U.S Treasury Bonds which
have a very good credit rating. I shares 20+ tend to peak before the beginning
of a financial crisis. This makes sense since a lot of people want to find a hedge to save
their assets. Figure A Figure B Figure C
So… What will happen to Bitcoin? Scenario 1
During a ‘euphoric market’, retail and institutions are more risk-seeking, investing
in assets that have a higher yield potential. As shown in Figure A, high(er) risk assets,
such as the VanGuard FTSE Emerging Markets ETFand the Australian Dollar, saw great returns.
You may have also noticed that gold, also had similar returns, and this was partly due
to the ‘Commodities Supercycle’. However, there’s no doubt that the investments
to first get liquidated are the ones that carry the highest risk;
institutions and retail both require cash-flow during a financial crisis and the most logical
investments to get sold are the highest risk ones. Alternatively, they might seek to minimize
risk by investing into ‘safer’ investments, such as, the iShares 20+ Year Treasury Bond
ETF, Gold, etc. In Figure B & C, In this graph you can clearly
see that the assets that got hit hardest during the economic turmoil, were the riskier ones.
The VanGuard FTSE Emerging Markets ETF and Australian Dollar taking a ~80% hit (from
their all-time-high between 2006 and March 2009). In comparison, ‘safer assets’ took
a hit of ~30%. Now that’s out of the way, it would come
as no surprise that Bitcoin could get into trouble during a financial crisis, as it can
be considered a high risk investment, due to:
Market Risk — Bitcoin has only been around for nearly 10 years and still remains a highly
speculative asset that is purely driven by supply and demand. The only reason why Bitcoin
holds value today, is because of the growth expectation and possible future real use cases. Regulatory Risk — As Bitcoin is a step away
from the ‘traditional financial system’ and has the ability to be (more efficiently)
used for nefarious purposes, governments agencies have been trying to find a way to regulate
it. However, due to the nature of Bitcoin, this has proved to be extremely hard and the
‘the lack of uniform regulations about bitcoins (and other virtual currency) raises questions
over their longevity, liquidity and universality.’ Security Risk — Given the nature of the
blockchain, where all transactions are final and irreversible, security is a great risk.
Once Bitcoins have been transferred from Party A to Party B, the only way for have them returned
back, is for Party B to explicitly refund them. Since Bitcoin-related activities (wallets,
exchanges, etc.) live in the digital world, they are open to hackers, malware and operational
errors. For example, once a malicious actor gains necessary access on an exchange to illegally
transfer Bitcoins from the exchange to his own wallet, there’s no way to reverse such
action. There have been number of exchange hacks, most notably, the Mt. Gox hack in 2014,
which led to losses in excess of $450 million at the time.
Fraud Risk — Since Bitcoin is pseudonymous and has a low entry barrier, it carries a
larger risk of being used fraudulently. Scammers and fraudsters have a much easier time selling
‘false’ Bitcoins, in comparison to, a bond or a stock.
Scenario 2 Gold has long been considered a ‘safer asset’
during times of economic turmoil and this can be proven by the charts above. Gold took
a hit of ‘just’ 30% during The Great Recession, in comparison with other assets that took
losses of over 80%. Bitcoin has been long-called ‘digital gold’,
for a number of reasons. Although Bitcoin set out to become a ‘digital currency’,
it also performs exceptionally well as a store of value. It shares a number of characteristics
with gold, such as: Scarcity —It’s quite hard to gauge how
much gold is in circulation and what the total supply could be, but there’s no denying
that gold is scarce. Similarly, there can ever be 21M Bitcoins minted (as of today,
we’ve minted ~17.5M Bitcoins). Durability — Although gold can wear slightly
if not handled properly, both gold and Bitcoin are extremely durable. Gold doesn’t rust
nor corrode and Bitcoin can’t be destroyed nor altered, even if the internet was to disappear.
They can both stand the test of time with no impact to their composition.
Fungibility — The property of a good or a commodity whose individual units are essentially
interchangeable. One ounce of Gold will always be equal to another ounce of gold (given the
same purity) and similarly one bitcoin is always equal to another bitcoin. In addition, Bitcoin has (even better) properties,
that gold doesn’t. These include: Storage — Bitcoin is digital, gold is physical.
Storing Bitcoin is extremely easy, whereas, storing gold isn’t as straight forward (nor
safe). Many gold investors use third-party vaults, bringing cost and risk. In addition,
carrying gold along is quite inconvenient as it has some fixed allowance limits and
also creates high possibilities of theft. On the contrary, Bitcoin is stored in a digital
wallet and has no physical space requirement. Digital wallets can easily be restored using
a seed phrase, in the event they are no longer accessible (i.e. new phone).
Security —This comes down to how securely an individual stores his gold (physically)
or Bitcoin (digitally). Obviously, it’s much easier to securely store Bitcoin than
gold and that’s why third-parties are often involved in gold storage, which brings greater
risk. Portable — Bitcoin can be ‘carried around’
much easier than gold. Gold is inconvenient to carry around (fixed allowance limits) but
also comes with a greater risk of theft. On the other hand, Bitcoin can be carried around
with just your phone. Portability brings a host of other benefits such as Divisible —Although gold can be divided,
it can’t be divided easily nor in a highly precise manner. On the other hand, Bitcoin
can easily be divided down to 8 decimal places (with possibility for more). Method of Payment —As noted above, Bitcoin
set out to be a ‘digital currency’ and can still perform pretty well as such (despite
a few technical limitations which are being worked on). Although gold can be traded electronically
(exchanges, etc.) it can’t really be considered a currency as you can’t just rock up to
a grocery shop and pay with gold, whereas, you could easily do that with Bitcoin (given
necessary framework is in place). It still takes time for adoption. Finite Supply— Although, in theory, gold
is scarce, there is a possibility, that more gold can be mined (undiscovered gold deposits,
meteor mining, etc.). On the other hand, Bitcoin will only ever have 21M coins minted, period.
Having the above in mind, one could argue that, Bitcoin could perform, as well as, or
even better than gold once we get into murky waters. Where does all this leave us?
In my opinion, there are two very important factors that will determine which scenario
will play out once this financial crisis hits — liquidity and investor confidence. Thanks a lot for watching. If you enjoyed
this video then feel free to hit that subscribe button, but it is also okay if you don’t
want to. It’s up to you.