Bitcoin may protect investors from depleting fiat, not drowning economy

Bitcoin may protect investors from depleting fiat, not drowning economy

2020 has witnessed multiple global events, all of whom have had an impact on the broader financial market. With the recent increase in COVID-19 cases, investors and traders around the world are now coming to terms with estimating its potential impact.

Traditional markets are suffering worldwide and according to a recent report, the stock markets recorded their worst week since the financial crisis of 2008. In fact, U.S treasury bonds were also plummeting to its lowest yield points ever.

Keeping all these facts in mind, many have speculated that Bitcoin’s potential as a safe-haven asset may come into play. However, the jury is still out on that narrative. Bitcoin‘s price hasn’t been safe from depreciation as well, with the largest crypto-asset registering a substantial downfall during the second half of February.

Although Bitcoin’s case as safe-haven is not exactly false, according to Messari, it cannot be considered as a hedge against recession. Sharing comparison with Gold, investors may sell their BTC in the current scenario in order to reduce liquidity hindrance on their other traditional holdings.

Hence, Bitcoin cannot be relied upon to hold significant value when the rest of the market is undergoing corrections and declining value. The aforementioned can be validated as Bitcoin gradually rose with global equities after the Bank of Japan released a comment that they would be taking necessary steps to stabilize its financial markets.

Even though such price movements cannot be taken solely to indicate impact, it adds up to the fact that Bitcoin reacts to other market sentiments as well.

Bitcoin hedge against fiat

Instead of acting as a hedge against recession, Bitcoin could possibly act as a hedge against fiat currency. The world’s largest digital asset can potentially provide a safety net against fiat monetary values, but not a depleting global economy. It is imperative to observe Bitcoin’s reaction with respect to a central bank’s actions such as Quantitative Easing or any other stimulus which could be put in place to navigate through COVID-19’s impact on the economy.

However, it is also important to note that Bitcoin as an asset class is still small. With its $160 billion market cap, the asset does not provide a substantial safety net to investors during the present-day economic turmoil.

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