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Farewell to “digital gold”: the Corona crisis turns the Bitcoin world upside down

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The Bitcoin industry is suffering from the recent price turbulence. Professional investors lament the loss of a “safe haven” – crypto enthusiasts sense new opportunities.

What do Bitcoin and toilet paper have in common? If you believe the net community, both are assets – and toilet paper rolls are the more lucrative ones in the Corona crisis. At least, that’s what it says in a post making the rounds on Twitter and online forums right now: “Toilet paper is the new Bitcoin!”

The trigger was probably the story of an Australian who, faced with empty supermarkets, auctioned off a roll of toilet paper on Ebay. He quoted $1,000 as the price to illustrate the absurdity of the offer. Then it happened: the roll of Woolworths toilet paper actually found a buyer, as the Australian television station “Seven News” reported.

Behind the episode, however, lies a fundamental insight: Bitcoin is not the “safe haven,” the “digital gold” that many in the scene had recently declared it to be. The virtual currency is not suitable as a stable store of value in times of crisis, as the recent price crash shows.

This has consequences for the crypto industry, for private investors, but also for institutional investors. The future of the crypto world – it is facing a reassessment because of the Corona crisis.

This is already shown by the recent turbulence: In the past week and a half, the price of the most important cryptocurrency has collapsed by almost half, from just under 8,000 dollars to around 4,500 dollars, as data from the analysis firm Coinmarketcap show. Bitcoin was thus at its lowest level since April 2019. Since Thursday, it has been on the rise again: on Friday, it was quoted at around 6,600 dollars, a full 22 percent up, but still far from the 10,000 dollars in mid-February.

Other virtual currencies also zigzagged: the second-largest currency Ethereum fell by double-digit percentages in the Corona crisis, then was up on Friday. Ripple, Bitcoin Cash or Litecoin also showed similar developments. Analogous to conventional asset classes such as stocks, oil and corporate bonds, it went down significantly in the meantime, only gold did better (see chart).

The end of “digital gold
Apparently, Bitcoin and Co. are more vulnerable in the Corona crisis than thought. “Despite the sharp drop in price, Bitcoin has failed to attract investors,” admitted Naeem Aslan, market analyst at online broker Ava Trade after the crash. He expects the price to fall further: “To me, anything below $3500 is very attractive.”

“Bitcoin is a risky asset,” also said an employee of a major crypto startup in New York, who prefers not to see his name in print. “And right now, all the risky assets are just being sold.”

With the price turbulence of digital currencies, their status as “digital gold,” a “safe haven” in times of crisis, as dreamed of by observers, has become a distant memory. In the past, crypto enthusiasts had argued that the virtual coins represented a revolutionary asset class that was increasingly decoupled from developments on the financial markets. There is now no talk of that.

As an analysis of the industry portal BTC-Echo shows, bitcoin recently correlated more strongly again with classic asset classes and indices such as the Dax – and also gave a significantly worse picture here than the gold price, which is still more independent in comparison. “Digital gold has not secured investors’ deposits, and it doesn’t look like an uncorrelated digital asset either if the price is striving downwards in step with all classic markets,” chief analyst Philipp Giese sums up.

What is the reason for this development? Scene insiders blame the entry of institutional investors via futures and other instruments for the higher volatility.

Fickle professional investors.
“Bitcoin increasingly appeared in the portfolios of professional investors and funds in the last two to three years,” explains Christoph Bergmann, operator of the industry website Bitcoinblog and one of the most prominent experts on the scene. “They have bought cryptocurrencies because they hoped to have found a safe haven. At the same time, they are even more inexperienced with virtual assets and sell more quickly than convinced crypto investors when faced with uncertainty.” As a result, “The very institutional investors the scene has long so desired are bringing uncertainty into play.”

In the Corona crisis, he said, many retail investors also bailed out as a result, triggering a cascade of sell orders. Will the zigzag course continue like this? Bergmann reassures: “The panic will certainly subside again.” Private investors are already getting back in, he said, while institutional investors continue to sell. “If bank loans burst, states have to finance short-time work and central banks print new money, then private investors in particular will look for investments like Bitcoin.”

The fact that especially convinced crypto fans are already using the cheaper prices to buy more can be seen, for example, in the growth of corresponding Google searches. A survey by the Berlin-based crypto bank Bitwala, which is active in 32 countries with over 50,000 registered users, also suggests this conclusion.

According to the report, three out of four Bitwala customers bought Bitcoin instead of selling it in the past crisis days, during which the Fed, among others, drastically lowered the key interest rate. Transaction volume rose to a record high. “The current actions taken by the Federal Reserve are a Band-Aid in uncertain times. Nevertheless, many fear that continued money printing by governments and central banks in response to the crisis will sooner or later lead to the erosion of government-backed currencies,” Bitwala CEO Ben Jones said.

Many diehard crypto fans therefore “prefer non-corruptible Bitcoin to the uncertain monetary implications during the crisis,” he interpreted. “The response from our customers also signals hope in times of global crisis that we need Bitcoin in a new, connected future to exchange digital assets over the web.”

Fluctuating Stable Coins
Not everyone is so optimistic, especially in the U.S. crypto scene. Here, a whole new industry has emerged in response to bitcoin’s arrival in the financial mainstream: It is grouped under the buzzword “Decentralized Financial System” (DeFi). DeFi, like bitcoin, is based on the database technology blockchain, but complements its vision with automatically running digital contracts called smart contracts.

Growing largely unsupervised in 2019, DeFi now represents a kind of shadow Wall Street. So-called stable coins, cryptocurrencies with stable value, whose idea Facebook wants to copy with its Libra Coin, play a central role in this system. DeFi startups issue loans backed by these virtual coins. And sophisticated crypto exchanges are organizing themselves, in some cases, in a completely decentralized manner. Overseers like Bank of England Deputy Governor Jon Cunliffe are watching the new coins closely and want to enforce the rules that apply to conventional money on them as well (see interview).

For fans of Bitcoin’s original vision of creating a financial system “from below” that breaks with the power of traditional banks, DeFi is enticing. But even the latest incarnation of the crypto idea has faced serious difficulties from the recent price turmoil. The system is proving particularly vulnerable in a crisis: for example, DAI, the stablecoin from the startup Maker, which is actually strictly pegged to the dollar, ran into severe turbulence last week. At times, one DAI was worth significantly more and significantly less than one dollar. And other well-known stablecoins, such as Tether, had similar problems.

The turbulence comes at an inopportune time. For years, the crypto industry has been hoping for a return to the good old days, when major currencies kept hitting new record highs. But it doesn’t look like that at the moment – Corona crash or not.

For example, Consensys, a well-known U.S. startup that aims to expand the Ethereum ecosystem, has recently had to repeatedly cut jobs and change its strategy. Now the company is betting on a collaboration with banking giant JP Morgan Chase, among others. That promises steady returns – and is meeting fierce resistance. The scene’s ambitions to replace Wall Street have suffered a reality shock.

“Halving” ahead.
Will bitcoin and other major crypto coins persist well below previous highs after the Corona shock? Or is there a prospect of a renewed price rally? Observers are pinning hope on the so-called “halving event” coming up in May. This is understood to mean a change in the Bitcoin algorithm that tightens the supply. The mysterious creator Satoshi Nakamoto had programmed in an upper limit of 21 million Bitcoin to prevent inflation. 18.2 million have already been produced.

New Bitcoin are received by the network’s accountants, the producers for their computationally and thus power-intensive maintenance of the Bitcoin blockchain. Until now, the “miners” have been credited with 12.5 Bitcoin for each new data block added. In the future, it will only be 6.25 bitcoin. So, since the supply is falling drastically, optimists expect a rally.

The “stock to flow” model is particularly popular in the scene: this simple calculation model assumes that abrupt drops in Bitcoin supply will directly drive the price under constant conditions. For 2021, some analysts expect a bitcoin price of 100,000 dollars on this basis – and let investors dream.

Other observers are much more sober. Crypto-blogger Bergmann, for example, sees an effect of the “halving”. Analogous to the curbing of oil production by Opec, it will reduce selling pressure in the long term, i.e. it will have a price-driving effect. But: “In the past, halving was often a non-event because it was already priced into the price. It could pale in comparison to other factors. I wouldn’t bet on us seeing a new all-time high anytime soon.”

Bergmann believes it is an aberration that the idea of a “safe haven” has become so dominant in the debate about bitcoin’s future. This focus, he says, has led to virtual coins being on the retreat as an everyday means of payment. And that very thing, he said, is harmful to the entire crypto scene in the long run. “Bitcoin is thus turning from a global currency into a niche asset,” Bergmann concludes.

Most recently, even pioneers such as computer manufacturer Dell, which introduced Bitcoin payments in 2014, had cancelled this option again. Enthusiasts see this as the real problem. If the Corona crisis puts a damper on the dream of “digital gold,” then, they hope, there could be room again in the crypto world for the original vision.

Hello, I have been working as an investment consultant and author for more than 20 years. I love what I do and I have enriched everyone around me. A lot of money is not important, the main thing is how you use the money.

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