Bitcoin is ‘safer’ in a stock market crisis

Apart from the fact that Bitcoin is not integrated with traditional finance, it also has another trick up its sleeve: it can’t be forcibly sold to cover your financial losses in other markets. This is very good news should there global stock markets collapse.

We know that Bitcoin’s price is volatile. This is because there is what Marcel Pechman calls “the discrepancy of its use cases.” Some see it as a store of value, others as a tech project or a type of software and network.

The stories about Bitcoin’s potential change over time. El Salvador’s BTC adoption should show us how the Lightning Network performs, with the Layer 2 scaling solution allowing instant and very cheap transfers. Pechman says, “As these narratives about Bitcoin shift over time, so does BTC’s correlation to traditional assets,” gold being one that has attracted special mentions. For example, the March 2020 crash caused devastation in almost every asset class, but during the six or seven months that followed, recovery was virtually identical for gold and Bitcoin.

BTC also appeared to “mimic the Hong Kong stock market”, Pechman points out, if you follow the Hang Seng Index. However, will it succumb to the Hang Seng downward movement seen in the past 90 days? Pechman suggests it might be better to decouple it from the Hang Seng now and allow Bitcoin to continue being “a safe haven amid a general correction.”

Due to the recent disastrous results for China’s Evergrande Group that forced the company to postpone payments over its debt, which is in the range of $300 billion, analysts are concerned this could severely impact the broader market. As we have seen over the weekend, almost all cryptocurrencies have taken a dive. The crash in May this year was also due to China, in this case the banning of crypto mining.

Bitcoin has never faced a major economic crisis, largely because it was created in response to the previous one. Now there could be one that puts the $250 trillion-plus global debt markets at risk. Could Bitcoin survive this?

Pechman says: “Until Bitcoin becomes fully entrenched in financial markets and accepted as collateral and deposits, the mid-term systemic risk for the cryptocurrency is lower than the traditional market.”

In this case, having Bitcoin could save the day if the global stock markets crash, and because it has an edge over traditional markets like commercial real estate, stocks, and bonds. That’s worth thinking about.

What’s the difference between gold and Bitcoin?

The answer to that question is simply this: Bitcoin (BTC) is more of a medium of exchange than gold. It stands to become the medium of commerce on the Internet, something that gold will never be.

The Lightning protocol, built to scale transactions on the Bitcoin blockchain, makes online payments to merchants possible via the Visa network, and as I’ve written about earlier this week, Mastercard is going crypto-friendly for payments as well.

Then there is PayPal’s acquisition of Curv, the Israeli startup developing crypto asset custody technology. PayPal is already allowing its US account holders to buy crypto, and while it might be that the PayPal purchase of Curv has more to do with support for Bitcoin as an investment, it is impossible to forget that e-commerce is its main reason for existing. So, there is probably something more afoot than at PayPal, and we may have to wait a while to find out more about its next strategy for crypto.

Galen Moore at Coindesk has taken a look at Bitcoin’s place in e-commerce from two perspectives: its actual use in commerce, and a macroeconomic indicator that highlights one of the ways in which bitcoin is nothing like gold.

First, the Lightning protocol allows for faster and cheaper Bitcoin transactions, and its data is a “good proxy for interest in using bitcoin for everyday commerce,” Moore writes. At the moment, the metrics show Bitcoin’s use in commerce on the internet, remains stuck at a ceiling set in 2019 to stand at about 0.008% of bitcoin’s free-float supply (a Coin Metrics measure of bitcoin held by addresses active within the past five years).

This favours those who see Bitcoin’s use in commerce as negligible, such as U.S. Treasury Secretary Janet Yellen, who said, “I don’t think that bitcoin … is widely used as a transaction mechanism. To the extent it is used I fear it’s often for illicit finance.” That old chestnut!

Moore points out the $100 bill is hardly used in commerce either – a bit like the €500 note that is so rarely seen it was at one time referred to as a ‘Bin Laden’. The Federal Reserve says “Larger denominations such as $100 notes are often used as a store of value, which means they pass between users less frequently than lower denominations.” Indeed the estimated lifespan of the average $100 note is 22.9 years, nearly three times the lifespan of a $20 bill. Yet, the $100 bill is a popular product, with an estimated $1.42 trillion worth of $100 bills in circulation, more than seven times that of the commerce-friendly $20 bill. 

But you can’t compare Bitcoin with lower value dollar bills: it is more like the $100 note, because investors hope that Bitcoin will become like that large denomination bill, to be both a bearer instrument and a store of value. Moore says, “Like the $100 note, bitcoin isn’t valuable necessarily because it is spent, but because it could be spent.” And in this way, it is nothing like gold at all.

Biden & a Sustainable Investment Boom

Now that the Electoral College has confirmed Joe Biden as the 46th President of the United States, businesses can get on with looking to the future under a new administration, one that promises less scorched earth in its policies let’s say.

In the months preceding the 2016 election, sustainable investing’ was a gathering trend. Larry Fink, Blackrock’s CEO sent an open letter to global CEOs, saying, “Generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors facing companies.” Any ambitions on this score were, however, shattered by the surprise election of Trump, whose administration was a threat to goals when investing around climate change and social justice,” says Justina Lai, chief impact officer at San Francisco-based Wetherby Asset Management.

The last four years has been a case of missed opportunities thanks to an obstructionist government.  However, as it finally drew to an end, the pandemic and the murder of George Floyd, amongst other issues, revived commitment to socially conscious investing.

Peter Krull, founder, CEO and director of investments at Asheville, North Carolina-based Earth Equity Advisors, said: “The reality is we’ve had more growth over the last four years than we did over the previous 12 years. After the 2016 election, people said that if the government isn’t going to work on these issues, we’re going to have to do it for ourselves.” He added an upbeat thought, “If the last four years of growth were with headwinds, I’m really excited about seeing a tailwind.”

How much ESG investment is there?

The United States Forum for Sustainable and Responsible Investment (US SIF) reports that total Environmental, Social & Governance (ESG) investing strategies rose by 42% over the past two years, growing from $17 trillion to $20 trillion. This figure represents 33% of all professionally managed US assets.

It is the view of Forbes writer Jason Bisnoff, and most likely many others, that President-Elect Biden will not have to do too much to encourage more growth in ESG investing. Furthermore, his picks for cabinet positions include several ESG investment supporters, such as john Kerry, who is his choice as special presidential envoy for climate. Allison Herren Lee, the current SEC commissioner may take the position of SEC chair, and she has made ESG and climate change central to her agenda in her time in public service.

Fiona Reynolds, CEO of the United Nations Principles for Responsible Investment, commented, “Over the last couple of years, the Trump administration brought a number of policies that made responsible investment more difficult and we hope that we can reverse some of those policies and move ahead.” Now, she says, “I’ve never felt more certain about the future for sustainability than I do at the moment.”

This enthusiasm from all quarters, plus Biden’s promise to bring the USA back into the fold of the Paris Agreement on Climate, bodes well for the future of this approach to investing.

Biden’s win boosts global stock markets

In the few days following the US election cut off date, stock markets hovered in an indecisive way, following the ups and downs of the counted votes. One minute it looked like Biden was winning, then trump, then Biden, until finally we knew it was definitely Biden who won. And that is when the world’s stock markets broke out of a stranglehold and shot upwards, with Japan’s stock market hitting its highest level in almost three decades. It wasn’t the only one: the FTSE 100 also saw a surge on Monday after the president-elect was declared on Saturday.

Billionaire hedge fund manager, Leon Cooperman, spoke to Jonathan Ponciano at Forbes. Cooperman is a Biden voter, and while he is not particularly bullish about the long-term health of the US economy, he believes the short-term will be favourable for stocks. He says that this will be the case, even if the results are challenged, which is already an ongoing battle.

Cooperman also suggests that with Biden in the White House and Congress split, as well as the Federal Reserve keeping interest rates low, are all positive points, especially when combined with the prospect of a vaccine to tackle the pandemic, and another stimulus bill becoming law.

On Wall Street in the long term he is decidedly more bearish. He points to the US government’s debt of $27 trillion, up nearly five times on 20 years ago. It more than doubled in the last decade due to coronavirus spending and Trump’s tax cuts.

It is interesting that Cooperman is still pursuing growth stocks. For example, Alphabet, Google’s parent company, Amazon, Microsoft and Facebook are in his portfolio. His view on these is, as he told Ponciano. he’s not buying, “but not selling, either,” and called them “better than gold.” He also offers some tips on less expensive stocks, citing Cigna, one of his favorites, Navient, Spectrum and General Motors as “having good stories.”

His main complaint is that there is too much debt in the system: ”There’s a long-term consequence to what’s going on; there’s just too much debt in the system. . . . I’m assuming in the next 12 to 18 months something will happen that changes this Goldilocks environment, and it will force the hand of the Fed.” 

Cooperman emphasized looking at how many investors are now back to eyeing the prospects of additional fiscal stimulus, vaccine development, as well as any decision by the Federal Reserve to raise interest rates once again, as being the things to watch.