Economic deterioration leading to currency tightening may not be conducive to the price growth of Bitcoin.
In its market research report this week, Coin Metrics pointed out that since the outbreak of the COVID-19 pandemic, the circulating supply and market share of stablecoins have shown significant growth. On the other hand, with the global economy entering a recession and countries worldwide struggling to avoid currency tightening, this is not good news for Bitcoin.
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Stablecoin Market Share and Supply Increase
As the impact of the COVID-19 outbreak on global financial markets began (with the S&P 500 hitting a historical high around February 19), the supply of stablecoins in the cryptocurrency market started to increase. Following the significant drop in Bitcoin on March 12-13, there was a noticeable growth in the supply of stablecoins.
On the other hand, with the dual impact of Bitcoin's value against the US dollar nearing a halving and a significant increase in stablecoin issuance, the market capitalization of stablecoins doubled compared to Bitcoin within a few days:
Uncertainty in Relation to US Stocks
According to the analysis by Coin Metrics, after a joint sell-off with global stocks two weeks ago, which led to the highest historical correlation between Bitcoin and the S&P 500 index, the correlation gradually diminished in the following days. Long-term observations show that the correlation between Bitcoin and the S&P 500 index is inconsistent, with some days highly correlated and others completely independent, indicating that its asset properties still lack a definitive answer.
During past events such as the US-China trade war and the US-Iran conflict, Bitcoin has demonstrated its hedging characteristics effectively, but this time it plummeted along with the securities market. The mainstream explanation for such a massive sell-off is that, in addition to macroeconomic impacts, factors such as debt repayment demands, additional margin requirements, portfolio risk reduction, and deleveraging triggered a liquidity crisis in Bitcoin, leading to the large-scale sell-off of Bitcoin.
Impact of Currency Tightening on Bitcoin
The following chart shows market participants' expectations of inflation over the next five years:
Coin Metrics pointed out that the expected inflation rate over the next five years was originally estimated to be around 2%. However, in the past week, with the realization of the economic impact of COVID-19 and the decrease in oil prices (a key factor determining overall inflation), there has been a significant drop in inflation expectations. Despite unprecedented monetary policies implemented by the Federal Reserve and most central banks globally (such as unlimited QE), the situation of currency tightening has not improved. If Bitcoin is considered a store of value tool, a market environment of currency tightening will have a negative impact on Bitcoin because store of value tools generally attract investors during inflationary periods, and in a state of currency tightening, investors are less willing to allocate assets to any commodity.
Related Reading
- Which Hedge Assets Shine During the Spread of COVID-19?
- The Attribute of Currency Tightening Does Not Guarantee Long-Term Value
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