We need to distinguish two fundamentals when it comes to Bitcoin and cryptocurrencies: (1) their market nature, which I referred to in my previous article, and (2) their dependence on economic conditions. The resurgence of the COVID-19 virus involves the weakening of an already afflicted economy, which could play a major role in the history and future of cryptocurrencies. Decryption …
A NEW ECONOMIC PHASE TO COME
So far, psychology has remained stronger than economics. We have so far experienced a first phase of crisis. The psychologically limited nature of the crisis made it possible to avoid a systemic economic crisis. Explanation for the generalized financial rebound in addition to the massive injections of liquidity. However, as expected, economic confidence begins to deteriorate again with the fall.
As gold, stocks or oil stagnate, crypto currencies like Bitcoin have been pulling away from the landscape in recent weeks. Strong economic threats to come for the next few months (and dozens of months), will allow cryptos to be confronted for the first time in the face of real economic uncertainty.
I will not go into detail here on the reasons why the economic risk is extremely high for 2021. Probably greater risk than in 2020 due to uncertainties about the recovery in an already heavily weakened context, the continued health threat for the coming months, or the banking and primary (agriculture) situation. The very probable arrival greater systemic risk in the next 4 to 6 months involves liquidity risks on the markets.
It is therefore to be expected that the crypto market will be potentially affected in the medium term. However, the structural reality that this range of assets seems to reflect could greatly strengthen the long-term upside potential. It would therefore certainly be fairer to see the risk of economic instability to come in the coming months as an interesting opportunity to monitor.
Fear and Innovation
It’s quite paradoxical, but Bitcoin and cryptocurrencies are both driven by security research and the search for innovation, like halfway between stocks and precious metals. The general fall in yields implies the manifestation of two distinct dynamics:
- 1 / The rising economic tensions in the long term, and therefore the search for security. Lower rates mean higher debt, wage austerity or even lower potential growth and inflation. All this is favorable to an anxiety-provoking context (drop in velocity, etc.), and therefore favorable to a greater need for security for agents.
- 2 /Acceptance of risk, and therefore the search for innovation. Lowering returns means taking more risk for the same return on investment. In addition to fostering an anxiety-provoking context, the current economic balance favors easier risk-taking. This is probably one of the reasons that can explain the enthusiasm that some cryptos are raising and have raised.
This makes it easier to understand why Bitcoin and other cryptos are here today. They meet very specific contemporary economic needs. It’s a fact. Special needs that gold or stocks alone could no longer meet. In short, Bitcoin and cryptos are an economic response to the tensions generated by the economic balance of the past 40 years. There is no reason for this to change fundamentally in the next few years.
In this, although risks persist in the medium term, it should only benefit the crypto industry – and over Bitcoin – long-term.