Opportunity for Bitcoin in Crisis times, behavior & evolution

Background

Users of bitcoin now included 45 millions of individuals and companies . This community of users is growing fast. Mass adoption of bitcoin and crypto currencies is relying on the scalability of blockchain networks, the security of the data sent through those networks and on the availability and efficiency of tools facilitating app development. Those characteristics condition the success that bitcoin can have with investors or potential users.

First, Blockchain has proven and is proving everyday the security of its protocol. No one has been able to hack into the bitcoin network to create false transactions. Secondly, Blockchain industry is still at an early stage but more and more developers are creating tools and standards to develop blockchain based apps. The main obstacle to mass adoption appears to be the scalability. Indeed, on a cryptocurrency network, bitcoin blockchain included, the transactions processed per second ratio is very low compared to banking networks. The bitcoin network can process between 3.3 and 7 transaction per second whereas VisaNet can process tens of thousands transactions orders per second. To sum it up, the bitcoin network is very resilient but not the most effective to process massive amount of transactions, precisely at a time where there are multiple adoption opportunities for the first crypto currency.

In a context of growing adoption and a troubled economic period, how does bitcoin behave and how can bitcoin evolve ?

We will look at the behavior of bitcoin price the past month to try to understand what happened before looking into the opportunities for bitcoin in financial crisis times.

Short term

From 8 to 9 March Bitcoin price went from 9 100$ to 7 700$, that is already a big drop but it’s just the beginning. The 12th March after the announcement that the coronavirus pandemia was getting stronger, Bitcoin fell by 23% in 1 hour (lost $1 500).

Making this crash one of the biggest and most sudden in the history of the oldest crypto currency. The massive price drop means that several hundred millions dollars worth of bitcoin were liquidated on exchange platforms, making the price of 1 bitcoin drop from 5 8000$ to 4 000$.

At the end of the day, the 13th of March 2020, bitcoin lost around 33% of its value and the global cryptocurrency market cap lost 60 Billion $.

At the same time, the loss on regular Financial Markets was from 8 to 15%. Same thing was observe on the gold market that lost 4% in 24 hours.

Bitcoin is not resisting crisis very well but is a very liquid market, in crisis times investors want to get liquidity. So bitcoin is losing value but that’s because most of investors are looking for very liquid assets like cash. In addition, blockchain & cryptocurrency industry are still in early stage of development and actors of this industry are facing their first true crisis.

Bitcoin doesn’t appear like it’s fulfilling its role of « safe » value that investors can go to during crisis times.

However we can also look back at previous examples of safe value price behavior in troubled times. In 2008, gold had lost more than 20% of its value at the beginning of the financial crisis. After that its price highly rose and it played its safe value role once the financial crisis installed. Lots of the people who were likely to exit the market have now done it, people still holding bitcoin after this massive drop truly believe in Bitcoin’s future and will support Bitcoin in all situations.

Medium Term

ECB & Fed both decided to proceed to massive Quantitative Easing (monetary policy that aims to increase the amount of money in circulation) to keep the economy afloat, this will rise the amount of monetary mass and decrease the value of money in Euros and US Dollars. We are in a situation of inflation.

Unlike our financial systems, bitcoin monetary creation policy is programmed in advance and predictable. We are at less than 60 days of Bitcoin halving, around the next 11th of May, the daily creation of new units of Bitcoin will be divided by 2 according to the programming of Bitcoin’s blockchain. The yearly inflation of bitcoin offer will go below 2% which is totally acceptable in a modern complex economic system.

The halving is how bitcoin evolve and pulls its value from scarcity. The creation of new units of bitcoin needs work and the halving will increase the amount of work needed to create 1 new unit of bitcoin. Bitcoin miners will have to work twice that hard for the same amount of new units of bitcoin created, increasing its scarcity in a context of financial crisis where economic actors are looking for liquidity and something to store their value in.

During a financial crisis, a commonly observed behavior is that actors tends to invest their assets to what we call « shelter values » like real estate, precious metals or raw materials. A huge drop on the financial markets comes with a loss of confidence in traditional financial systems, consumers and investors move their money into assets likely to hold value during financially trouble times. In this scenario, Bitcoin could potentially fit as a digital shelter value, hence increasing its value and establish its position as a commodity once and for all.

Long Term & conclusion

Blockchain and bitcoin change the way we can exchange value. We are here talking about a radical change in our financial and monetary system that is likely to impact lots of established players in a top industry sector worldwide, hence the massive adoption of blockchain by numerous actors in the financial system will take time. Bitcoin represents a long term investment, and we will see over the coming months its ability to stand out during crisis time.

As far as I’m concerned, Bitcoin network is proving every day its resilience and its abilities to organize an independent economic system, making it a perfect back up plan for investors, including institutional ones, that wish to save their asset’s value. The question now is, will the Bitcoin network prove its efficiency in case of massive adoption ?

Axel Baechelen.

Magna Numeris is a startup developing solutions for cryptocurrency users, pushing the boundaries of conventional platforms to help grow the peer-to-peer economy