Macroeconomic events have taken a heavy toll on every financial asset.
We are now living in an age of global pandemic. Coronavirus and the ever-present threat it poses has crippled every major Western economy, plunging the world into what is likely to be a deep and sustained recession. It is also the first highly-contagious virus to appear in the age of social media, 24/7 crypto markets and rolling news coverage. The effects of the disease — however fatal or long-lasting it turns out to be — are being amplified to an incredible extent.
Make no mistake. These are historic times. When outside of wartime would we see airlines grounded, food items rationed in supermarkets and citizens urged to stay indoors for months at a time?
Bitcoin lost roughly 50% of its value in a single day on Thursday 12 March 2020. From a spot price of $7,915.33 per coin, the price fell as low as $4,144. While the price has since re-establised support at around $5,200, this precipitous fall has led some in the industry to level a strange accusation at Bitcoin. That it is not a safe haven hedge against falls in wider stock markets.
The enormous Bitcoin wipeout mirrored panic-selling in equity markets as investors fled out of stocks and into cash. But it happened for entirely different reasons. More on that below.
There is a certain measurement widely-cited for stocks and shares called the VIX index — often called the Fear Index. In recent days it has hit record highs far beyond anything seen during the 2008 financial crisis. The VIX is a measurement of how volatile investors believe markets will be, derived from futures contracts on the S&P 500.
At the closing bell on Monday 16 March 2020 the VIX was at 82.3. For reference, the highest volatility we ever saw when too-big-to-fail banks like Lehman Brothers collapsed in 2008 was 79.1.
Crypto markets have no such closing bell. Trading is 24/7. And yet its own Fear vs Greed Index shows sentiment heavily against cryptoassets. 100 on the scale implies bullishness, or extreme greed. 0 implies bearishness, or extreme fear. At current count the index reads just 11. As recently as 13 February, the index was at 65.
No safe havens in troubled times
Just two months ago Bitcoin was heading to a 180% price increase across 12 months as the 2019-2020 bull run saw the price of the world’s most-traded cryptocurrency shoot past $10,000.
What has happened to traditional safe havens like gold, platinum and silver can be applied directly to Bitcoin and other cryptoassets. And the accusation now levelled at Bitcoin — that it can not be considered a safe store of value in times of market turbulence — is a misread of the situation.
At midday on Monday 9 March 2020 the gold price hit seven-year highs at $1,700 per ounce, while the Dow Jones Industrial Average plummeted 1,000 points and 10-year US Treasury bond yields, considered one of the safest investment assets, fell to historic lows below 1%.
On Monday 16 March 2020 the Dow plunged by 3,000 points. For context, in normal economic times, a 1% or 2% fall in markets is newsworthy. 3% or 4% gets front-page headlines. But 7%? 10%? We’ve never seen falls like this before.
Emergency circuit breakers that close US markets for 15 minutes when selloffs hit 7%, 13% and 20% were put in place to curb panic selling and stop a total market collapse. These have now been triggered three times in two weeks.
As panic-selling became widespread, gold prices cratered 17% to $1,462. Again, these are historic numbers. Over the same period the silver price fell by over 31% to $12/oz, a price last seen in January 2009.
Policy analyst at Standard Chartered bank, Suki Cooper, explained what happened in a note to investors.
She said that while the price of precious metals had been boosted by investors spooked by spectacular falls in the value of their stock and shares, even safe havens fail in a liquidity crunch. The precious metal encountered heavy selling as investors cashed out of their positions in order to meet margin calls and offset losses elsewhere.
Gold remains at the mercy of the broader asset-liquidation scenario.The same thing happened to Bitcoin and other cryptocurrencies. As highly liquid assets, that is, ones that can be quickly swapped for cash, they too were at the mercy of the historic market selloff.
The Great Margin Call
This was especially exacerbated by investors gambling with massive leverage on Bitcoin futures products, for example on BitMEX, an exchange known mostly for its leveraged derivatives: perpetual contracts and futures contracts. Effectively traders bet on the price of Bitcoin and other cryptoassets to rise or fall in a set amount of time.
If traders go long and the price of Bitcoin goes up, they make money. If they short Bitcoin and the price falls, they make money.
When the Bitcoin price started to fall, stop losses were hit leaving investors with their positions wiped out. And it was all amplified by the insane kinds of leverage available on BitMEX. With a perpetual contract, traders can quickly access 100 times leverage. So with an initial deposit, (called ‘margin’) of just 1 BTC traders can buy 100BTC-worth of contracts.
The rewards can be great if you bet right. If you get it wrong, as so many people did not forsee, then the losses can be vast, far greater than the margin traders put up to begin with.
When the price moves against you, this can result in near-unlimited losses. Unlike futures contracts, BitMEX perpetual contracts do not have expiry dates.
As the site suggests: “A trader goes long 100 BTC of BTC/USD at a price of $600. He is long 100 BTC x $600 (60,000 contracts). A few days later the price of the contract increases to $700. The trader’s profit will be: 60,000 x 1 x (1/600 – 1/700) = 14.286 BTC.” That’s around $75,000 at current prices.
But losses are potentially so much greater because of the way these contracts inverse. If the price had in fact dropped to $500, the trader’s loss would have been: 60,000 x 1 x (1/600 – 1/500) = 20 BTC, or around $104,204. Traders do have to put up collateral in the event of losing vast sums. Cars, houses or fiat bank accounts for example. When the price fell, thousands of traders would get a margin call, asking them to deposit funds to cover these massive losses. It’s something of a meme in the investing world that margin calls are the only ones you can not ignore.
To say that these kinds of trades are highly risky is to grossly understate the case.
Coindesk reported how brokers and lenders made $100 million of margin calls in the days after the price drop.
Coronavirus cash handouts: What happens now
There are two major events that are about to hit the crypto market. The first is related to the monetary policy measures governments are taking to restore confidence and kickstart household spending.
A tax cut or rebate would take too long to get money into investors’ hands. In the months of trickle-down, lasting damage would be done.
And with every other confidence-boosting measure having spectacularly failed, the US policy is now to helicopter cash payments of up to $2,206 to every household in America. This has already happened in Hong Kong, where in its late-February budget the government planned to boost the economy by handing out a one-time unconditional HK$10,000 (£1,000) payment to every citizen over the age of 18.
Japan is considering the exact same strategy it applied in the wake of the collapse of Lehmen Brothers in 2009: to hand ¥12,000 (£94)
That means after the historically deep sell-off, a massive wave of liquidity will hit financial markets. When that will happen is not certain. It could be three months, six months or longer. We can see stock markets — and Bitcoin — rebounding in a huge way.
The second price event is just around the corner. It has fallen out of news headlines as coronavirus has taken all the oxygen out of the room.
We are now only weeks away from Bitcoin’s halving. That’s where the supply of Bitcoin from mining rewards is cut in half. As of 18 March 2020 we are at block number 622,086. Contained in that block are 1,906 Bitcoin transactions. At block 630,000 the reward will be slashed 50% from 12.5 BTC to 6.25 BTC. Traditionally in the wake of halving events, the price of Bitcoin has soared. And it is now half the price it was a little over two weeks ago.
The mindset of scarcity out there in the real world is what is driving panic buying, with long lines at supermarkets and people fighting over dry pasta and toilet rolls. But the reality of scarcity — baked in to Bitcoin’s model, is what will make it return.