Can Bitcoin Bounce Back? (And Why Cryptocurrencies are so Volatile)
The first quarter of 2020 has been a roller coaster start to the decade, so far, we've had Australia's largest bush fires, fears of World War 3 actually starting, as well as a global pandemic being declared for Novel Coronavirus (COVID-19). But how has Bitcoin fared?
Bitcoin, as we know, is the facade of the Cryptocurrency world, it's the blockchain we all know and see in global news stories - Which is why it is so widely traded too. Bitcoin has taken a pretty big hit with the recent COVID-19 outbreak, so much in fact, that it lost around half of its value last week (8th - 15th March). The real question anxious traders are asking now is, will Bitcoin's price go back up?
Bitcoin's Volatility Explained
First of all, we have to understand why Cryptocurrencies, like Bitcoin, are subject to volatility, more so, than the global currencies we know and use, such as Pounds, Dollars and Euros. Cryptocurrencies have much smaller markets than the global currencies we use most often for buying and selling goods and services, hence whenever there is a small movement in Bitcoin, its price is likely to move by much more than its Dollar, Euro, Pound counterparts, to name a few.
In late 2017, Bitcoin peaked at just shy of $20,000 on the market, since then it has never got close to that kind of price. Now, with a real possibility of the COVID-19 pandemic resulting in a worldwide recession, Bitcoin may be able to get back to those kinds of prices. When there is a recession, nobody really likes to invest in stocks of companies, because they are more susceptible to dissolve (A bit like in the 2008/09 global financial crisis). Due to how sceptical investors are probably getting at the moment over the global lockdown, those people who invest with the banks may turn their attention away from them, and head to markets like Bitcoin.
The Cryptocurrency Price "Floor" - When prices stop falling:
Bitcoin miners will eventually stop mining when the price gets too low because, unlike a company, Bitcoin cannot just die out, instead, it would simply not be mined for a length of time, or at least until the price of the Cryptocurrency is corrected due to an eventual turn in demand. Dependent on how bad the imminent global recession gets, Bitcoin has the opportunity to become the new gold of the 21st century.
Countries will ultimately create money and pump it into the economy in order to save businesses, and with more currency circulating in an economy comes a drop in the value of a said currency.
Can we Call Bitcoin the New Safe Haven?
The world's currencies can, and probably will weaken, so much so, that investors will see Cryptocurrency as a much better short/medium-term investment. Bitcoin has never really been regarded as a long term investment strategy, it is just easier to make a positive return on over a shorter period compared to currencies like the dollar.
This can be backed up by the fact that Bitcoin has risen in value by $2,000 since its trough on the 13th March. As the economy approaches an ever-looming downturn, Bitcoin should become a safe haven for investors, especially since the next halving is due in May 2020. Bitcoin halving is a process that happens every four years which sees the number of Bitcoins rewarded when mining halved, essentially making Bitcoin a more sought after "digital commodity", a little like gold and oil are in the real world when we see shortages of them. The last two Bitcoin halvings have seen the price of Bitcoin increase by 80x (Bear in mind Bitcoin was formed in 2009), so in just over 10 years, Bitcoin has gone from a low-value mine to a cryptocurrency worth thousands of dollars.
What are the Risks - & Should You Invest in Bitcoin?
Now, if Bitcoin can regain half of the value it lost in a week, it is clearly a very volatile investment, however, to call it risky would be very subjective. Bitcoin has only ever gone up in price exponentially year on year, although it is an Airline and somewhat unrelated to Bitcoin, Singapore Airlines have seen their share prices fall in value overall, in the last 20 years, the same trend can be seen with various other global companies who struggled during the 2008/09 financial crisis.
Whether you want to invest in Bitcoin depends on your take of the next 3-6 months, most importantly. A lot more laws and restrictions in relation to COVID-19 will come into place, meaning companies shareholdings, as well as physical currencies like the dollar, are ultimately going to lose value. Also, with banks around the world now holding physical transactions for up to 14 days, it paves way for digital transactions now, more than ever, as experts have explained that COVID-19 is easily able to survive on any surface for up to 2 weeks if the conditions are right, and notes of cash are clearly no exception.
But how do we know Bitcoin will appeal to the masses? We don't, but a finite currency serves far better than one (i.e. the Dollar) that is constantly having more money pumped into the economy in the attempt to improve liquidity. By having a hard cap of their 21 Million coins, Bitcoin could possibly be one of the few investments that will most likely move as an anomaly in comparison to other investments, but whether that will be in the right direction, no one really knows for sure. The only thing we know is that we are not even close to the worst part of the recession, that is if there is one happening currently.