The Market and Crypto Assets During an Economic Crisis

New Characteristics of Economic Crises

Although the reasons for economic crises in history vary, they are often purely economic issues that can be resolved through economic means such as lowering interest rates and printing money. In these crises, some companies go bankrupt while others are reborn; some people go bankrupt while others become wealthy as a result.

However, the current economic crisis presents different characteristics. It is not just an economic issue, but also involves a global public health event. Although many official statements attempt to downplay the impact of the pandemic, the actual situation is concerning. This new virus has a long incubation period, high transmissibility, and severe health threats; the combination of these characteristics makes it a highly challenging issue.

The response of the U.S. government and financial institutions to this crisis has sparked unease in the market. The Federal Reserve has taken unprecedented emergency rate cuts, reducing interest rates to near-zero levels. This approach is akin to a doctor facing a tricky case, using all available medications at once, which inevitably raises concerns in the market about the economic outlook.

Bitcoin: Safe-Haven Asset or Risk Asset?

In this financial turmoil, Bitcoin's performance has prompted a reevaluation of its status as a safe-haven asset. Although Bitcoin was previously often regarded as "digital gold," during this global financial crisis, its price trajectory has shown a stronger correlation with traditional risk assets such as crude oil and stock indices.

The reasons why Bitcoin is regarded as a safe-haven asset mainly include two points: first, compared to fiat currencies that can be printed in unlimited quantities, the total supply of Bitcoin is fixed, which theoretically can counteract inflation. Second, Bitcoin is easy to store and transfer, and may be safer than traditional assets during special periods. However, this crisis has shown that the safe-haven properties of Bitcoin differ significantly from those of traditional safe-haven assets like gold.

It is worth noting that there may be a gap between the market's perception of the risk-hedging properties of assets and their actual performance. During calm periods, the market may speculate on certain assets based on risk-hedging expectations, but in a real crisis, the performance of these assets may differ significantly from expectations.

Performance of Stablecoins

In this financial crisis, the most prominent performer in the digital currency market has been stablecoins, particularly a well-known stablecoin. From October of last year to now, the price of this stablecoin has increased by about 20%, while other major Crypto Assets have generally dropped by around 25%. This phenomenon indicates that holding stablecoins may be more advantageous than holding other Crypto Assets during times of market turbulence.

A well-known stablecoin, although not the only one on the market, is the one with the largest market share. Recent development trends of this stablecoin show that its Ethereum-based ERC20 version has taken a dominant position, with a market capitalization share exceeding 60%.

It is worth mentioning that the issuer of this stablecoin adopts a strategy similar to that of fiat currency, which is to increase the issuance of currency without disclosing specific information. Although this practice has sparked some controversy, most users seem to have accepted this status quo due to its dominant position in the market. From an economic perspective, as long as the increase in issuance is not excessive, the value of the stablecoin will not collapse as a result, which is similar to fiat currency.

Adjustment of Investment Strategy

Given the current market conditions, investors need to adjust their investment philosophy towards Bitcoin. Now, Bitcoin should be viewed more as a risk asset rather than a traditional safe-haven tool. Investors can participate in the Bitcoin market through value investing or trading speculation, both of which have the potential to yield returns.

It is worth noting that economic crises often provide ordinary people with opportunities for social mobility. A global financial crisis like the one we are experiencing now may be extremely rare, and therefore may contain valuable investment opportunities.

However, we must bear in mind that the Crypto Assets market is highly volatile, and investment decisions should be made with rationality and caution. Everyone should develop an investment strategy that is suitable for themselves based on their risk tolerance and investment goals.