There appears to be increasing anxiety in cryptocurrency markets after the prices of Bitcoin (BTC) failed to maintain above the psychological $10,000 level in February. The disappointment came less than three months ahead of the highly anticipated Bitcoin halving. Although Bitcoin had performed relatively well compared to other major asset classes before massive corrections happened in March, recent macro events have long been looming in both the traditional and crypto markets. That extra layer of uncertainty seems to remain intact, at least into the near future.
However, looking back in time, investors may find the current market conditions in 2020 to look somewhat like those of 2012. Both are Bitcoin halving years, both have a global crisis, and both have turbulent equities markets. Can history reveal more details about pre- and post-halving from a macro perspective?
February was a tough month for cryptocurrency markets. With escalating fears around the coronavirus outbreak, BTC prices plunged from levels of around $10,400 in the middle of the month to close around $8,500 at the end of the month. This risk-off sentiment was also high in global equities markets. The Dow Jones Industrial Average registered its worst one-day drop in history on March 9, losing 2,013.76 points. And this came on the heels of the previous largest point loss of 1,190 points on Feb. 27. Commodities also took a hard hit, with West Texas Intermediate going below $50 per barrel.
On the other hand, the demand for safe havens surged, with the 10-year Treasury yield briefly reaching a record low of below 0.4% before settling down at around 0.8%.
The broader market reaction seems to have painted a bleak picture, and cryptocurrency markets were not immune. Some even questioned Bitcoin’s characteristic as a safe-haven asset, as it seems to have failed to hedge against uncertainties.
Travel back in time
The upcoming Bitcoin halving remains a primary focus for most crypto watchers, despite the new global market turmoil. Recent BTC price actions and high volatility in other assets could worry some long-term crypto investors, causing them to question whether halving is self-complacency or a true long-term bullish factor.
Perhaps, we can look at the year 2012, when Bitcoin was first halved and when markets were also in turmoil. That year, the culprit was the European debt crisis.
Starting in 2009, some European Union member countries were unable to refinance their government debts, and a few were unable to bail out their deeply indebted financial institutions without help from the European Central Bank or the International Monetary Fund.
The overall equities market and cryptocurrency space in 2012 were, of course, very different from what we have today. However, the risk-off sentiment, pessimistic outlook and fears of a recession are comparable.
Interestingly, the prices of Bitcoin increased by about 160% in 2012, on the back of the eurozone debt crisis. Most of those gains happened before the first halving, and profits were even more noticeable the year after the halving. By comparison, that same year, the S&P 500 gained 14.5% and the Euro Stoxx 50 jumped by about 11.2%.
It’s a currency matter, after all
We've been highlighting the store-of-value nature of Bitcoin and continue to believe that it is an ideal hedge against inflation, due to its limited supply. In other words, Bitcoin could be a good hedge against fiat currency depreciations.
The European debt crisis was centered on the structural problems of the financial system and the easy credit conditions of the early 2000s. As a result of the crisis, there was a massive bailout program and interest rates were lowered, causing a significant depreciation of the euro. In late 2011, the euro was traded against the United States dollar at greater than $1.40. By mid-2012, the euro–dollar trade dropped to around $1.20, before rebounding to $1.30.
The debt crisis resulted in some significant currency depreciation, and Bitcoin reacted to that depreciation in 2012, even before the first halving event took place.
Considering the ongoing uncertainties related to the coronavirus, the current situation is fundamentally different from the debt crisis. Yet, what the market is experiencing is looking somewhat like what we went through in 2012. We believe that markets should focus more on how policymakers react to the outbreak and the resulting economic consequences.
The U.S. Federal Reserve cut interest rates by half as an emergency measure to respond to the virus outbreak at the beginning of this month, and cut interest rates for the second time in less than two weeks. The U.S. dollar Index has dropped from the upper 99 handles to the low 97 levels. Markets expect the Fed will slash rates even further during its March policy meeting. At the same time, the narrative of easing from other major central banks has emerged very quickly. Those shifts could cause pressure on the G-10 currency foreign exchange market, and that could be an additional factor that benefits Bitcoin prices over the medium to long term.
When it comes to halving… be patient, remember?
In our previous publication, OKEx Quant pointed out that Bitcoin’s price rise after halving has a tendency to take a while, and this market cycle is not expected to complete until 2022. Although recent price actions may not look so bullish, OKEx Quant believes that the market currently remains at an ideal hodling period, and long-term investors probably need to be more patient to see the results.
The Bitcoin market was still tiny at the time the European debt crisis erupted, and it’s still relatively small today, compared to other major asset classes. Bitcoin and other cryptocurrencies may not be the best instruments to hedge against a worldwide recession, as Bitcoin hodlers can liquidate their holdings to compensate for their losses in other assets or repay their debts. However, when crises come, policymakers tend to resort to easing, and Bitcoin could be an ideal hedge against currency devaluations. The global market developments in this pre-halving period could be essential for all crypto investors, and how it unfolds could be a dominating factor in terms of future crypto allocations.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Cyrus Ip works at OKEx as a research analyst. He provides value-added Bitcoin and altcoin analysis and has produced macro thematic research that bridges the gap between the crypto world and traditional financial markets. Previously, Cyrus worked with Citigroup, where he served as an FX market analyst with a focus on G-10 and emerging markets. He was also a long-time financial journalist with solid experience in China, Hong Kong and Canada.