What will happen to Bitcoin in the upcoming recession? Coronavirus has caused economic shock via the lockdowns. These lockdowns will be followed by the biggest economic recession since the Great Depression 1929-1933. How will Bitcoin perform in this crisis?
This blog article will look at the following questions:
- What is happening in the markets now and why?
- In which phases will the coronavirus crisis play out?
- What’s happening with Bitcoin? Will there be the next Bitcoin crash? Will there be a crypto crash?
What is happening in the markets?
The lockdown has caused layoffs and rising unemployment. There is a difference between Europe and the United States:
- In most European countries it’s not so easy to lay off employees, that’s why there is the delay in European numbers
- However, it’s easier in the United States. That’s why the initial unemployment claims in the U.S. give a better indication about the state of the economy
These are the initial unemployment claims for the U.S. Not all of these initial claims will be registered as official unemployment, but most of them will. Official unemployment numbers will be reported with a lag, they are at 5% at the moment. However, they should more than 20% – as much as during the Great Depression 1929 – 1933.
All U.S. jobs created since the 2008 financial crisis have been wiped out in just some weeks.
However, it’s not the market, which has decided which jobs to wipe out – the market would wipe out the jobs, which create the least economic benefit. But it’s the government bureaucrats, who have decided which sectors should be locked down and which should not. As the market forces are substituted with the hand of mediocre bureaucrats, then the recovery will take longer.
Purchase Manager Index
The Purchases Manager Index is a forward-looking index, if it’s above 50, then this is economical expansion. Otherwise, it’s an economical contraction. The U.S. PMI has collapsed more than during the 2008 financial crisis. The GDP growth/decline ratio will follow the PMI.
Eurozone PMI has collapsed as well:
The central banks and especially Federal Reserve have responded with massive money printing. Federal Reserve has announced 2.206 trillion USD base-money creation, which is in total 59% of Federal Reserve’s balance sheet till now. Additionally, Federal Reserve announced a 4 trillion USD base-money stimulus for the corporations. This would result in a 150% growth of the USD base-money within the months.
Here is the growth of the Federal Reserve balance sheet (hint: this is just the beginning…):
G20 countries have launched fiscal support programs in the size of 6% of the GDP. This stimulus will be financed with the new debt, meaning someone has to buy this debt. Governments are indebted already – 100% – 160% depending on the economy. More than half of the debt is short-term debt, which needs to be refinanced every year. Probably the fixed income markets will not have enough demand for government debt. This implies that the central banks will start to finance government debts.
How will the coronavirus crisis play out?
Some people say that increasing unemployment and declining PMI does not matter. They say, when lockdowns are finished, people go back to work as usual as they go back to work Monday’s. But it’s not so – the economy is a web of supply/demand relations between millions of participants. Demand from one party creates supply for the other one. Supply from one party allows the other party to finish their products. We can visualize this as the graph of relationships between the economy participants. But, this graph structure, the web of connections, is broken. It’s not about “going back to work on Monday“, but it’s about “re-building the engine“.
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In the previous articles, we have analyzed how this crisis will play out:
- Coronavirus crisis versus the 2008 financial crisis – Where is the difference?
- Coronavirus crisis – Where to invest now?
- Coronavirus and the Bitcoin price – What’s next?
Here is the summary of what will happen next in the traditional markets:
1st Phase – Declining revenues (we are here)
As the economy demand is declining, the revenues of the companies will start to decline, too. This leads to the decline in their earnings, which will then lead to the decline of their stock price. That’s the logical reasoning of the current stock market crash.
2nd Phase – Failing zombies
The quantitative easing (the creation of the new base-money by the central banks) has created in the last 10 years an army of the zombie companies. These companies are not able to cover their capital costs in the normal interest rate environment, their operational revenues are too small for this. These companies can exist now only in the current very low-interest-rate environment. If their interest rates would grow or if their revenues would decline, then they will end up in the bankruptcy.
The interest rate for the corporate credit will start to grow – because the banks are aware of the situation of the zombie companies, so the banks just start to charge more interest (higher risk premium). We will get a situation, where banks will start to give less credit to the economy, which results in the continuous defaults and bankruptcies of the zombie companies.
3rd Phase – Bank Failures
These bankruptcies will create the losses to the banks – the banks have loss provisions, but the anticipated losses from these zombie companies will be magnitude higher than the loss provisions. The banks have to pay these losses with their equity. As a result, the banks will start to give even less credit to the economy, there will be a credit-crunch and this will lead even more zombie companies into the bankruptcies.
The banks will receive bail-in and bailout. However, there will be no more funds available after the excessive fiscal stimulus. This leads to even more massive base-money creation, which will be more as we see now.
The result will be the nationalization of the banking sector. The nationalization of the pension funds will follow. The taxes will be significantly increased as governments are looking for the funds. This will be the wealth transfer from the middle class to the government balance sheet black hole.
4th Phase – Monetary reset
Gargantua base-money creation will result in the hyperinflation, people will stop using the fiat currencies and they will move into the alternate blockchain-based financial system. The government will not tolerate this and they will respond with the monetary reset – the introduction of a new monetary system.
The next monetary system will be probably gold-based – gold still implies trues. As central banks possess still significant amounts of gold in their balance sheets and as the gold price will grow significantly due to the monetary debasement, central banks will be well equipped to launch the new gold-backed monetary system.
Will there be the next Bitcoin crash?
The coronavirus crisis will be a monetary system crisis. All monetary assets – Gold, Silver, Bitcoin, and Ethereum – will perform extraordinarily in the next years.
There might be small bumps on the road, like in the middle of March S&P 500 selloff – Bitcoin price declined than 30% although Bitcoin has been considered a safe-haven asset. This was unexpected for many. We explained the reasons for this in the article “Coronavirus and the Bitcoin price – What’s next?” The key reason was that some overleveraged hedge funds got on the wrong side of the trade when the markets crashed. These hedge funds received margin calls and had to deliver cash into their trading accounts. They were selling anything and everything to deliver this cash.
Next selloffs of the S&P 500 index will come. This will happen probably after the Q1 results and later the Q2 results will be published. Bitcoin price might get impacted like in the first selloff. However, this is a short term effect.
However, it’s a monetary crisis, where massive amounts of new base-money will be created. It’s a monetary crisis, which by our forecast will end with the monetary reset and introduction of a new gold-standard. This means all monetary assets, including the Bitcoin, will see 10x – 100x increases in the prices – just because the fiat money is becoming more worthless each and every day.
- Central banks will respond to the coronavirus crisis with massive money printing (base-money creation). The Federal Reserve has increased his balance sheet by 50% within 2 months, in the next 12 months, a further 100% increase will follow
- Governments have launched massive stimulus packages, but as there will be fewer creditors for government debt, central banks have to finance governments. This will require additional base-money creation from the central banks
- This will lead after the initial deflationary shock to an inflationary shock, where people start to lose trust in the fiat currencies
- All monetary assets will perform in this environment – Gold, Silver, Bitcoin, Ethereum. Their advantage is that they are not manipulatable in supply as the fiat base money is manipulatable by the central banks
- The inflationary shock will lead to a banking crisis and bank nationalization. Monetary reset will follow
- This results even in a bigger price increase of the monetary assets (including Bitcoin)
For more information about the webinar please check out the related articles from the SmartCredit.io blog:
Coronavirus crisis versus 2008 financial crisis – Where is the difference?
Why is the central banking interest rate so low and why it is so high for the SME’s
Coronavirus crisis – Where to invest now?
Blockchain-based financial system – Are we ready?
Coronavirus and Bitcoin price – What’s next?
Please note, this is not financial advice. Therefore, you should always consult with your financial advisor before you make investment decisions.