How the “perfect storm” in the traditional market gave Bitcoin a chance


Many experts associate the current rally in bitcoin with the monetary policy of the US Federal Reserve System (FRS), which weakened th...

Many experts associate the current rally in bitcoin with the monetary policy of the US Federal Reserve System (FRS), which weakened the dollar's position. Meanwhile, the United States economy is imbalanced: despite the strong economic decline, the financial market continues to grow. Why is this happening, is the West really threatened by inflation and why bitcoin is doing well in the "perfect storm" of the crisis - we understand the material.

A money printer to help the economy

At the end of March, the US Congress in the form of law  passed a  large-scale program of assistance to the national economy (CARES Act). The size of the program  was  more than $ 2 trillion - this is support for businesses, states, the health care system and ordinary citizens. The most famous part of the program is the one-time gratuitous payments from the state (the so-called "helicopter money") in the amount of $ 1,200 to each American with an income below $ 75,000 per year. As of early June,  159 million people received checks for this amount  .
The aid program was funded in part by the Federal Reserve System, which added trillions of dollars to turnover in a short period of time. In June alone, the Fed "printed" $ 1 trillion -  more than in the entire 200 years since the founding of the United States. The Fed spends this money   on buying up Treasury bonds and mortgage-backed securities on the market.
In addition, by the end of June, the Fed began buying  corporate bonds for the first time in history  to help the largest US companies deal with their debt burden amid falling revenues. As a result, from February to August, the total amount of assets on the Fed's balance sheet increased from $ 4.1 to almost $ 7 trillion - the current value  can be tracked  on the regulator's website.
The Fed applied other monetary policy measures, such as cutting the key rate to 0-0.25%. Lower interest rates make the cost of loans cheaper, encouraging the population and businesses to take them. 

Market response to the aid program

Due to the global lockdown, national quarantine and uncertainty, a large-scale panic began in the US markets in early spring. However, government action has contributed to a dynamic recovery.
Thus, by June the stock market  recovered  to the indicators of the beginning of the year. Since the lows reached on March 23, the Dow Jones is up 48%, the Nasdaq Composite is up 45%, and the S&P 500 is up about 45%. Now the indices are close to the highest values ​​recorded at the end of February.
Quarantine and volatility in the stock market amid a difficult economic situation stimulated a massive influx of retail investors. The largest US brokers  reported  in May a record growth of new accounts (170%) in the first quarter, when the quarantine was introduced. Most of the new investors were young people.
Most of the "helicopter money" - gratuitous payments from the government for a softer overcoming of the consequences of the coronavirus - many Americans have spent on gambling. For example, Yodlee analyzed 2.5 million bank accounts and  found that people with incomes from $ 35,000 to $ 70,000 (who got into the "helicopter money" program) increased their spending on trading stocks by more than 90% within a week after checks were received from the state.

Record economic collapse

For the real economy, the effects of the pandemic have become tangible only recently. On July 30, the Bureau of Economic Analysis  released  statistics on US GDP.
It turned out that in the second quarter of 2020, the country's GDP collapsed by almost 33% compared to the same period last year, which became a sad record in the history of economic statistics (the previous largest collapse happened in 1958). At the same time, in the first quarter, the US GDP fell by 5%.
A similar situation is observed in other developed countries. For example, the GDP of the European Union in the second quarter  decreased  by 12%. In Japan, a   fall of more than 25% is expected . In Russia, the central bank  estimates  losses at 9.5-10% of GDP.
The Fed's policy led to a bubble in the stock market - the dynamics of the stock market now has an inverse relationship with the state of the economy. NatAlliance head Andrew Brenner expressed this opinion in a comment for Reuters: 
“COVID-19 is now inversely proportional to markets. The worse the pandemic gets, the better the markets look, because [in this case] the Fed is increasing its fiscal stimulus. This is what drives the markets. "
Difference in the dynamics of the stock market and GDP: The S&P 500 index rose despite the deep fall of the economy.  Source .
Another indicator of overheating in the financial sector is a sharp rise in the classic P / E (value-to-earnings) multiple of the S&P 500. Its value is close to the marks that were observed during the Dot-Com Bubble:
Change in the P / E ratio.  Source .
Moreover, the massive purchase of assets by the Federal Reserve System led to the fact that companies have increased the volume of corporate bonds. In the second quarter, US firms placed over $ 800 billion in liabilities, while the share of risky high-yield bonds increased:
Volume of corporate bonds issue in the USA.  Source .

Capital in search of a "safe haven"

There is a widespread opinion among economists and market participants that the record-breaking emission of the FRS could lead to accelerated inflation of the dollar. This, in turn, will threaten the collapse of the global economy.
In general, inflation is a normal phenomenon during economic growth and is regularly observed in the same United States. Now its indicators are small, but they can jump up due to the increase in the money supply when the demand for money falls. On July 27, the dollar index (DXY), which tracks the US currency against a basket of major competitors (euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc),  fell  to its lowest values ​​since 2018.
The risk of inflation forces investors to transfer capital to traditional defensive assets - primarily gold. At least, this is how experts  explain the  recent rally in gold: on August 5, the price of futures for the precious metal  reached  $ 2070, exceeding the highest historical value (in nominal prices), and continues to rise.
At the same time, due to the weakening dollar and low key rates, another popular defensive asset - US Treasury bonds - is losing its attractiveness. The yield on the two- and five-year securities reached a record low interest,  said  the company DataTrek. The yield on ten-year securities dropped to 0.5%, whereas just a year ago they brought 1.9% per annum.

A chance for bitcoin

Since the usual set of protective instruments turned out to be limited, investors turned their attention to Bitcoin, because the cryptocurrency market is not regulated (at least in theory) by the monetary policy of central banks.
So, in May, Paul Tudor Jones, the head of Tudor Investment Corp., which manages $ 39 billion in assets,  admitted that the company had transferred 1-2% of client funds to bitcoins. This was done, according to Jones, to reduce the impact of possible dollar inflation.
A few days ago, for the same reasons, MicroStrategy  announced  its intention to invest $ 250 million in bitcoins, gold and other "alternative assets".
Thus, Bitcoin has an opportunity to fulfill the role of "digital gold" - a store of value. After all, Satoshi Nakamoto developed the first cryptocurrency as a tool to protect against currency depreciation.
That bitcoin does indeed fulfill this role is indicated by the weakening of its correlation with the stock market. Although the US authorities cannot directly influence the crypto market, their leverage can manifest itself indirectly - through correlation with the stock market. When classic markets rise, investors buy bitcoin more actively, since it is traditionally considered a risky asset.
However, Quantum Economics analyst Mati Greenspan  noted that now the correlation of the first cryptocurrency with the S&P 500 index has dropped to its lowest values ​​since the beginning of the year. Moreover, according  to the  Skew service, the correlation between bitcoin and gold has grown, which speaks in favor of its transformation into "digital gold".
The fact that bitcoin is perceived as a defensive asset during a period of powerful inflation has already been noticed more than once   by the example of an increase in the volume of purchases of cryptocurrency on the LocalBitcoins P2P platform in countries where the national currency is rapidly depreciating. At the same time, the management of Pantera Capital fund recommends that all BTC holders adhere to a simple strategy: 
“Stay long in cryptocurrency until schools and social institutions open up. Until the economy starts functioning normally, money will continue to print. ”
While some expect inflation, others point to signs of another phenomenon - deflation. According  to  Nathan Sheets, economist at PGIM Fixed Income, excess money affects inflation only if the economy grows in spending, consumption and lending. Otherwise, printing new money does not have such an effect.
The opposite scenario is also possible - a strengthening of the dollar due to an increased level of savings and, accordingly, a decrease in demand in the economy. This phenomenon is called a  deflationary spiral and it impedes economic growth. However, while dollar deflation is  considered  unlikely, and the inflation rate remains low.



Crypto Currency Magazine: How the “perfect storm” in the traditional market gave Bitcoin a chance
How the “perfect storm” in the traditional market gave Bitcoin a chance
Crypto Currency Magazine
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