When the WHO officially declared the COVID-19 crisis a pandemic, all global markets crashed, including crypto. Bitcoin failed to function as a safe haven asset and was not spared during a mass global sell-off. However, that does not necessarily mean that holding bitcoin is a bad idea during the current crisis.
Since the beginning of March, the price of bitcoin is down by 40 percent, and the “digital gold” failed to function as a safe haven asset when risky assets tanked across the board. However, that does not necessarily mean that holding bitcoin is a bad idea during this global crisis.
In this article, you will learn why holding bitcoin during the COVID-19 pandemic could end up being the right move should a long global economic crisis follow.
The novel coronavirus pandemic is spreading across the globe, and the global economy is slowly grinding to a halt. Asset prices have been reflecting that since it became clear that COVID-19 was no longer a Chinese problem but, instead, a global crisis.
Stocks, corporate bonds, real estate, oil, (most) metals, and, of course, crypto assets have taken a hit as a response to the slowdown in global economic growth and the current market uncertainty.
Bitcoin’s recent 40% drop and its failure to act as a safe haven asset during a sharp drop in asset prices has sparked joy among Bitcoin critics, such as vocal gold bug, Peter Schiff.
He tweeted: “[…] Bitcoin has finally proven conclusively that it’s neither a store of value, a safe haven, nor a non-correlated asset. The Bitcoin chain letter has finally run out of links!”
However, Schiff does not seem to understand Bitcoin’s key features nor what type of safe haven the world’s leading decentralized digital currency actually is.
A safe haven against the fallout of an economic crisis
The Bitcoin protocol is designed to be censorship-resistant. In fact, censorship-resistance is probably its most powerful and innovative feature. It means that anyone who buys and holds bitcoin actually owns their funds. Funds held in bitcoin cannot be (easily) frozen or confiscated.
Bitcoin is not necessarily a hedge against a market collapse – when correlations breakdown and investors generally move their funds into cash – but a hedge against a widespread economic crisis that could lead to bank bail-ins, bank failures, or asset seizures.
Yes, the price of bitcoin could drop further. And yes, it has been acting more like a tech stock than gold in the past few weeks. However, how much of your money would you lose if the bank you are holding it in collapses?
If the global financial crisis in 2008 taught us anything, it is that banks can fail. Bear Stearns showed us that and so did Lehman Brothers. Moreover, between 2008 and 2012, the Federal Deposit Insurance Corporation (FDIC) had to close 465 failed banks in the US.
Depositors’ insurance covers deposits up to $250,000, but anything above that is hard to recover from a failed financial institution. Imagine you hold $1,000,000 in your regional bank and it collapses because it is not capitalized enough to withstand widespread loan defaults. In that case, you would abruptly lose 75% of your funds. Arguably, that puts a 40% drop in the price of bitcoin into perspective. Especially since the price of bitcoin can recover again.
Now, you may argue that bank failures are unlikely. That’s true. And so are bank bail-ins, but Cypriots experienced those in 2013 at the height of the European debt crisis.
A bank bail-in refers to a bank using its depositor funds to recapitalize to avoid a bank failure. In simple terms, that means banks take a percentage of your money that you have deposited with them to save themselves, and there is nothing you can do about it.
While this scenario may sound absurd, it is exactly what happened in Cyprus in 2013. From one day to the next, a one-time tax on bank deposits was levied and suddenly, every Cypriot who had deposits in the bank had money taken away by their government without their consent. When Cypriots went to withdraw money from their accounts, banks were closed to avoid a bank run.
No, that is not a scene out of a bank heist movie. This really happened and it could happen again. Why? Because the money you deposit in a bank is not really yours. It has your name on it but it is the bank that is in physical possession of it.
Conversely, if you hold bitcoin in a personal wallet to which you hold the private keys, that money is yours and yours only. No one else can access it. As long as you hold the keys, it is your money.
If the pandemic turns into a long crisis, HODL BTC
Should the fallout of the COVID-19 pandemic mean a global economic crisis worse than what we experienced in 2008, and to be frank, this seems to be the case, then holding a small percentage of your funds in bitcoin (in a wallet that you control) is probably a wise thing to do.
Bitcoin’s censorship-resistance means that even in the case of bank failures, bail-ins, cash shortages or a meltdown of payment systems, you will still have access to funds.
Additionally, unlike gold, bitcoin can also be used effectively as a currency. In the case of a meltdown of the traditional financial system, bitcoin adoption would likely skyrocket at merchants and retailers across the globe, which could create a financial lifeline for yourself, your family, and your business.
While this article paints a dark picture of how the world could look in a few months, we learned in the last few weeks that it is better to be prepared than to wait and see how things pan out. And part of being prepared for what could come could be HODLing some bitcoin, just in case.