As Bitcoin prices fluctuate, we ask whether COVID has caused a price surge?
Over a year since the coronavirus pandemic began and the world’s economy is still reeling from the worst recession since World War II. However, while global GDP deflated in 2020, Bitcoin prices continued to expand—ultimately setting a new all-time high of $40,000. But did COVID cause bitcoin’s price swell?
On March 12 2020, the global equities markets floundered as the world’s economy started to feel the strain of coronavirus-imposed lockdowns. Bracing for an imminent recession, investors jumped into cash as the ‘safest’ bet—causing liquidity strains and global markets to haemorrhage.
But the bloodshed wasn’t confined to traditional indices alone.
Surrendering to systemic risk, and falling in tandem with the wider economy, the bitcoin price plunged below $5,000—wiping almost 50% of its value in the halving nobody was expecting.
To add insult to injury, gold—a time-honoured safe haven—dived as low as 13% during March’s liquidity crisis, ushering in a period of extreme uncertainty.
Following the crash, bitcoin, gold, and the broader stock markets started to mirror each other’s movements. And correlations—specifically that of bitcoin and gold—began to reach parity.
The impact of stimulus on bitcoin prices
Since mid-March, the US alone has “printed” the equivalent of $1 million per second in efforts to allay the economic fallout of the pandemic. As a result, the M2 money stock has increased some 21%, climbing from $15.7 trillion in March to approximately $19.1 trillion today.
Yet, despite the economic downturn, the newly-tangled markets started showing signs of life as fiscal stimulus flooded the global economy.
With quantitative easing in full swing, fears of inflation and fiat debasement fed the narrative for bitcoin and gold. From the March lows to October the oft-analogised markets had advanced 180% and 31% respectively.
Simultaneously, with seemingly infinite helicopter money to play with, investors began piling into equities hoping to swap the ever-eroding value of the greenback for profit. This led to a 50% advance from the March lows across most major stock indices.
Bitcoin’s bullish decoupling
While bitcoin was moving in lockstep with gold, the precious metal’s rally stymied In October on the news of a coronavirus vaccine trial, causing the pair to detangle.
By November, bitcoin and gold displayed a six-month correlation coefficient of -0.72 — suggesting a weak, negative association between the two markets and clearing the way for bitcoin’s trademark volatility.
Simultaneously, as bitcoin soared to new heights, gold witnessed one of the largest weekly outflows in its history. And while there’s no concrete proof that gold investors rotated into BTC, it’s a theory that’s hard to ignore.
Institutions and businesses invest in bitcoin
Bitcoin’s parabolic rise has been underpinned by a growing institutional investor base. Its finite supply, alongside it’s non-conformance to the policies of central banks and governments, has served as an impetus for adoption.
Inflows to the various funds of digital asset manager Grayscale exceeded $5.7 billion in 2020, more than four times the $1.2 billion aggregate inflows from the previous 6 years combined. Moreover, those inflows came overwhelmingly from institutional investors (87%).
The argument goes that with gold’s rally faltering and bond yields struggling among unprecedented fiscal responses of central banks, investors have peaked outside the less opportunistic markets and spotted bitcoin instead.
Along with an institutional pivot to bitcoin, publicly-traded companies began to swap their fiat treasury reserves and buy bitcoin.
Staking claim as one of the first movers was MicroStrategy. Between August and December last year, the business intelligence firm loaded up on over one billion dollars worth of BTC. MicroStrategy’s foray augured similar moves from other publicly-traded entities, including the Jack Dorsey-led payments firm Square.
Today, there are approximately 33 companies worldwide with an aggregate stake of 1.2 Million BTC (currently worth $38 billion).
Taking note of the crypto sector’s renewed appeal, payments processor PayPal forayed into the market, adding bitcoin, ethereum, and host of another crypto to its payments remit.
A result of heightened institutional and retail approval eminanting from the unconventional monetary policies of central banks, bitcoin has recorded a total increase of over 560% since the lows of the March crash.
It’s important to note, however, that volatility works both ways. While bitcoin plateaued around $41,000 on January 8 2021, it has since retraced down to the $30,000 level— a significant correction that shouldn’t be undermined.
Still, with no end to global quantitative easing in sight, bitcoin’s narrative as a hedge against fiat debasement and macros risk is seemingly only growing stronger.