Will cryptocurrencies be a ‘safe haven’ asset post-pandemic?

Will cryptocurrencies be a ‘safe haven’ asset post-pandemic?
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The consequences of COVID-19 are expected to exceed that of the 2008 recession, as well as the Great Depression, and global economies are facing unprecedented and uncertain times. The economic shock reverberating around the world has forced governments to act quickly and implement policies and, with the effects of the pandemic permeating every aspect of society, many businesses are preparing to navigate in a new world, post-health crises. But what will an economic downturn mean for blockchain and cryptocurrencies?  Will Bitcoin ever be considered a safe haven like cash?

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Q1 2020 hedge fund letters, conferences and more

We have gathered commentary from a range of industry experts (below) including the Gibraltar Stock Exchange, Ontology, DeFiner, CRUXPay, and NEM Ventures who shared their insights on what a global recession could mean for digital assets.

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The Concept Of Bitcoin As A Safe Haven

Nick Cowan, CEO of the GSX Group, said:

“Cryptocurrencies are not immune to market turbulence, with natural fluctuations illustrating regular asset class behaviour in so far as smart money trading and herd mentality tendencies are clearly visible in the market. The dizzying price high that defined late 2017 was an unrealistic representation of BTC and the subsequent price drop painted a picture of high volatility. However, since then, market patterns have been generally positive, with normal peaks and troughs along the way. 

In terms of a post-pandemic market, I don’t expect cryptocurrencies to suddenly become a fixture in the safe haven category with gold for example. Rather, adoption levels will continue to increase, particularly as major financial institutions and fintech platforms continue to show interest in this asset class. However, the idea that blockchain-powered finance is limited to cryptocurrencies is passé, and there are other significant developments enabled by blockchain that will broaden global liquidity pools, specifically the proliferation of tokenized or digital securities. 

As we emerge from this global pandemic, I would also expect to see a considered reevaluation of the capital markets infrastructure, particularly around the T+2 model, the period in which securities transactions have been historically settled. This delay of two days places unnecessary stresses on the capital markets, particularly around the prevalence of counterparty risk. Harnessing blockchain can help classify this protracted settlement delay and counterparty risks as obsolete.”

Erick Pinos, Ontology Americas Ecosystem Lead, said: 

“Bitcoin was one of a number of technological innovations created in response to the 2008 financial crash, and in March 2020, the UK and US markets suffered their worst day since. 

The concept of Bitcoin as a safe haven during a global recession is one that has long been touted by industry players. However, so far, the current market downturn has not resulted in investors flocking to Bitcoin. At this point in the crisis, this is not surprising. It’s important to remember that it is still very early days for both the crisis, and for Bitcoin. Bitcoin has never lived through a recession, so it’s difficult to predict how things might pan out, and how actors might respond in what is likely to be a long road to economic recovery. 

What we can expect to see as a result of the global pandemic is an even greater spotlight on digital assets, each from governments, central banks, traditional investors, and enterprises. This is due to their ability to offer users increased trust, security, and access, while also providing an opportunity to avoid many of the risks associated with traditional markets and fiat currencies.” 

Jason Wu, CEO of DeFiner.org, a true peer-to-peer network for digital savings, loans, and payments, said: 

“A recession will be the catalyst for the mass adoption of digital assets and decentralized finance (DeFi). DeFi builds trust using code and mathematics, whereas the traditional financial system is based on human trust and company reputation. DeFi allows people to manage and own their assets without any intermediaries. The 2008 financial crisis taught people that financial intermediaries are not always trustworthy. The current financial system is associated with high-costs and lacks transparency. Thus, a future financial crisis could also be a factor in proving the worth of DeFi. Bitcoin was born from the last financial crisis and DeFi will thrive in these economic conditions. While a global recession will be good for digital assets, it will crush the market at the beginning due to the liquidity crisis. The world of cryptocurrency will suffer first, then prosper. There are three phases: Liquidity, Suffering, and Thriving. 

In phase one, the cryptocurrencies market will face liquidity issues and a price drop, as will all financial assets. This has happened last month as bitcoin price dropped dramatically from approx. $9000 to $4000. In the financial crisis, everyone is looking for liquidity, because their normal cash flow is interrupted. In phase two, cryptocurrencies will suffer, together with other industries. In this phase, a lot of companies will go bankrupt and people will lose their jobs. Financial institutions will go into default and bankruptcy, and balance sheets of depository banks will end up with a deficit. Then the central bank will step in and print out even more money. This will lead to inflation. In phase three, people lose faith in the existing financial system. DeFi is an alternative system for people to manage and grow their savings. It’s cheaper, faster, and gives back people full control of wealth. People will learn from their painful experiences and embrace the world of crypto to enjoy true financial freedom. For the next several decades, more and more assets will be managed through blockchain and the world of digital assets will thrive.”

Ashish Singhal, CEO and Co-founder of CRUXPay and Coinswitch.co, said:

“At first sight, the idea that digital assets and cryptocurrencies, such as bitcoin, are a safe haven seems to have gone out of the window. Cryptocurrencies seem to be taking as much beating as debt, equity, and commodities like Gold. This happens because, at the onset of a recession, when panic strikes, all fundamentals are lost. However, during a crisis, debt and equity lose value because of the decline in asset value and decline in profit, respectively. But the underlying value of cryptocurrencies doesn't lose value during a recession; infact, it gets even stronger.

A global recession is a defining moment for cryptocurrencies. The long-touted "bitcoin is a safe haven" is put to the test during a recession. A recession forces governments worldwide to introduce measures to ease the downturn, which will have adverse economic effects for years to come. Cryptocurrencies are inherently designed to be hedged against such implications. This makes an excellent case in favour of cryptocurrencies.

When the crisis starts, panic hits and irrationality creeps in; the markets will see a massive sell off in all categories. The decline in asset value and profits during a global recession will drive debt and equity prices to even lower levels. And this might further lower the prices of cryptocurrencies. However, it is not an indication of loss in the inherent value of cryptocurrencies. The underlying value of cryptocurrencies defined by decentralisation and mathematical stability will continue to hold even in the worst recessions. Cryptocurrencies will then become the choice of investment during such economic turmoil.”

Nicholas Pelecanos, Head of Trading at NEM Ventures, commented: 

Hidden in the bitcoin genesis block is a quote that perhaps acknowledges Bitcoin’s true purpose: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. The creation of Bitcoin is not incidental to financial crises but a direct response to the 2008 financial crash and failings of the global financial system. As a global recession or even depression looms, I’m more bullish on Bitcoin and cryptocurrencies than ever. Unlimited QE, unserviceable global debt, a failing monetary system and negative interest rates all at a time where society, globally is moving away from cash. This is precisely what Bitcoin was designed to hedge against. 

The crypto sell-off witnessed in March was a result of a global liquidity event and Bitcoin has now climbed 90% from its low—a swift recovery. More importantly than being a safe haven, Cryptocurrencies are an uncorrelated asset class. This alone can attract a lot of capital in times of uncertainty and with a total market capitalization of $200bn it won't take much capital inflow for the price to rapidly climb.”

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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