The pandemic has led to a forceful action by central banks, in an attempt to control the financing capacity of the States, through the intervention in bonds and offer liquidity to the banks for the granting of credit.
If we examine by central banks, we have that the Federal Reserve (Fed) lowered interest rates by one percentage point to 0% and launched stimulus in the form of QE in an amount of 700,000 million dollars. For its part, in Europe, the European Central Bank (ECB) expanded its QE program by more than 750,000 million euros.
On the other hand, in China, we have seen the People's Bank of China (PBC) inject 3 trillion renminbi into the banking system in the first half of February, with another 20,000 million at the end of March 2020, along with other financial support measures.
In the UK, the Bank of England (BoJ) plunged interest rates by 65 basis points to 0.10%, expanded its holdings of government bonds by £ 200 billion and made £ 330 billion available to companies sterling in loans and guarantees.
What does this all mean? Monetary intervention and discredit … There is a clear macroeconomic alteration and central banks are bordering on the limits of monetary policy. They have expanded their balance sheets more than at any other time, even after the global financial crisis. This reality has led to bond yields falling, and more than $ 18 trillion in bonds are in negative yields, an all-time high.
This reality has led to the resurgence of Bitcoin. Last week it managed to exceed $ 40,000 for the first time, rising to $ 40,402.46. This translates into a 700% rise from a closing low on March 12. He's on an incredible streak, crossing $ 30,000 for the first time on January 2 and $ 20,000 on December 16.
We find that the rise from the lows of March is supported by the monetary destruction and by other factors such as its acceptability. Not only by central banks that would open the doors to digital currencies. Added to this is support from institutional investors such as Fidelity and JP Morgan and large companies such as the mobile payments firm Square, which has stored part of its cash in the form of Bitcoin.
The volatility of this asset has little to do with currencies … The massive swings in prices show that Bitcoin is far from being the mature asset. For some, it generates confidence and attractiveness that is unregulated, but that same characteristic alienates others. Especially since Bitcoin is susceptible to hacking and money laundering.
Not only the action of central banks have motivated the rise of Bitcoin, but last year we saw how the production of the cryptocurrency was reduced by half. No one is in control of this process. It is a rule written in the underlying code of Bitcoin more than a decade ago.
That means a substantial drop in the number of new coins awarded to miners that provide a global supply of multi-billion dollar coins being created each year.
Already in the past when we have seen cuts in production, it has been motivated increases in prices and volatility that occur approximately every four years and act both to ensure the scarcity of Bitcoin and to maintain a cap on price inflation.
In the one-year periods after the two previous 50% cuts, in November 2012 and July 2016, its production increased about 80 times and four times respectively. Therefore, it is a catalyst, yes, but it is unknown to what extent it can finally affect the final production.
The COVID-19 pandemic provided the first widespread bear market conditions since the inception of cryptocurrencies, which has been an interesting context for the analysis of these types of assets. The traditional move would be to protect against volatility through gold or public debt, but many see Bitcoin as the new great safe-haven asset.
A statement full of doubts because in the period of a more recent year, which incorporates the current market turbulence related to the coronavirus. During this period, only Bitcoin and Ethereum show an average return is positive, but with relatively high volatility. And is that despite the rise, during this one-year interval, both Bitcoin and Ethereum have a maximum loss of one day of −47% and −56.6% respectively. With these characteristics, it is difficult to be considered a good refuge.