In a new report released by Grayscale, entitled “Bitcoin’s Quantitative Tightening vs. Central Banks’ Quantitative Easing”, the digital currency asset management firm suggests that the current macroeconomic environment could trigger a deflationary spiral.
With global debt reaching $255 trillion, led by the US and China, systemic cracks remain major concerns, particularly since the gargantuan figure has been snowballing and had accumulated by the end of last year – long before Covid-19 claimed nearly a quarter-million lives, rattled the markets, shut down entire industries and dislodged employees.
Amid ongoing money printing, stimulus packages, and the Federal Reserve’s resolve to continue to use its powers until the coronavirus pandemic is no longer a threat, investors are having to weigh the sustainability of traditional assets.
Grayscale analysts note four key tools that investors can use to stabilize their portfolios, citing issues with three of them due to their connections to an overly stressed global financial system.
Four Key Tools
- Fiat currencies – compromised by lots of money creation via quantitative easing. Investors may continue flocking to the strong US dollar, the world’s reserve currency, which runs the risk of destabilizing global assets.
- Government bonds – compromised by quantitative easing, high-interest rates, negative yields, and diminishing purchasing power
- Gold – riding against the digitalization trend and thwarting technological progress that supports portability and on-demand accessibility
- Bitcoin – denominated by demand, as opposed to debt, and remaining outside of the scope and influence of central banks
The analysts note that Bitcoin’s scarcity makes it an attractive investment diversification tool with its reduced correlation to other assets.
“However, through 2019 and during 1Q20, the relationship between Bitcoin and gold tightened, as correlation seemed to increase as a result of US-China trade tensions, the Iran escalation, and the COVID-19 market fears. The correlation between Bitcoin and gold is at a historical high, indicating that Bitcoin may be acting more as a safe haven.”
The report concludes that BTC may perform the way gold did following the 2008 financial crisis because of solid fundamentals such as Bitcoin’s strong hash rates, high network activity, and evidence of long-term accumulation of the leading crypto.
“While the price of gold initially fell in response to plummeting asset prices and widespread bankruptcies, it appreciated over 180% from $682 in October 2008 to $1,912 in September 2011. Similarly, after initially seeing its price fall dramatically, Bitcoin is up 96% off of its March 12th lows.”
You can check out the full report here.
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