The real-world economy makes its mark on the digital economic ecosystem. That includes Bitcoin as well. We could see this dynamic in March 2020, and even now, though since then its price recovered. Let’s take a closer look at what happened and how Bitcoin relates to the world’s economic issues.
Why Bitcoin Fell Down in March 2020
There are a few distinct reasons that led to the Bitcoin crashing in March 2020. The first, and probably the most destructive and infamous one would be the mass panic caused by the coronavirus pandemic. With a lot of people afraid of a lack of liquidity, and that crypto will crash alongside stocks and fiat currencies, this became a self-fulfilling prophecy.
Another important factor was the Asian market’s short-selling BTC. With Asia being a major market for everything crypto, it led to a drop in its price. Though we now see it rebounding, a lot of people are still wary to deal with BTC, as coronavirus and the problems it causes are still on the large.
Any of those reasons wouldn’t be enough to rattle Bitcoin so much, but together they’ve managed to compound each other. This situation couldn’t last long, as market players adapted to new challenges, and now Bitcoin’s price is rising once again. Whether this rebound continues is unclear.
Does Bitcoin Correlate with Gold?
Bitcoin shares some similarities with gold, as both of those assets mostly behave as uncorrelated to the rest of the market. They are not affected by the volatility of other assets on the market. Or, at least they shouldn’t be. Now, let’s take a look at this chart:
While gold usually behaves more stable than Bitcoin, this crisis has shown a rather interesting correlation between the two, with both behaving similarly. Economists and crypto experts still research that behavior, so we have no definite answers on why that happened. The most plausible explanation for that would be that the panic was truly all-encompassing, leading to similar trends between the crypto market and the gold assets.
They also share some similarities:
Both assets are finite, with Bitcoin being programmed to only have a 21 million coins cap, and gold being a non-renewable resource.
They need to be mined (even if BTC mining is different), thus requiring time, effort, and resources to obtain.
Both of them are often treated as safe-haven assets by investors.
Comparisons between Bitcoin and gold are valid, at least in some cases. At the same time, BTC has its own trends that gold doesn’t. The differences between the two are pretty simple:
Bitcoin has a digital nature, while the gold is very much a physical asset.
Gold is a commodity: you can use it to create jewelry, computer parts, or just store golden bars in a vault.
Bitcoin is much more difficult to identify: most would call it a currency, but at the same time it isn’t a stable store of value, and rarely can be used as a method of day-to-day transactions. At the same time, it is not exactly a commodity either. BTC is something new that only a digital sphere could create.
Why Bitcoin Attracts Investors
Bitcoin attracts a lot of attention from both the public and investors for several reasons:
Bitcoin price. Currently, it is crypto with the highest price out of all its competitors. While it may fluctuate from time to time, and despite it being in decline for a while, BTC is still a desirable asset to have for any investor.
Scarcity. Bitcoin is a finite resource, as only 21 million coins were programmed to exist in the blockchain. This inflates its price; the fewer BTCs are left to mine. With predictions of Bitcoin costing more than $50,000 in the future, it is easy to understand why many investors would like to jump at that opportunity.
Usefulness. Bitcoin can be used as a fast cross-border payment method, as you wouldn’t need to worry about different monetary and economic politics between different countries.
Bitcoin has everything it needs to appeal to the investors: it has the potential to bring in a great profit, it has a high value, and it can be used besides the trading. All in all, it comes as no surprise that there are lots of people willing to invest in BTC.
And if you want to buy some, you can easily do that on Changelly, just by going through the processing:
Almost every economic action requires some sort of middlemen to actually work. Be it buying an asset, or investing in a company, you would need to go through the loops before you can do anything. At least, that is the case with fiat currencies and usual commodities, like gold. With Bitcoin, things work a little bit differently.
With Bitcoin being what it is, you can just as easily cut the middlemen out of the scheme, and sell/buy/invest by yourself. There are no codices to be followed, no law regulations to abide for, just you, coins, and profit.
That doesn’t mean that everything is sunshine and rainbows. While middlemen take a cut from your profit, they also help you to mitigate the risks. A good broker can find a worthy investment, a trading platform will enforce any deals made, and a real estate agent will ensure that the owner of the property is legit beforehand. Without them, you will have to make sure that everything is okay by yourself.
What’s worse, you most likely wouldn’t be able to confirm whether the other side works in good faith before the deal. This is where smart contracts come in. While most smart contracts work on Ethereum code, Bitcoin allows forming smart contracts on its blockchain as well. By using them, you will be able to minimize the risks without any need to pay a cut from the deal to another party.
Can Bitcoin Become Reserve Currency?
There is a rather heated debate raging about whether or not Bitcoin could be a global reserve currency. Some say that it would make a great reserve currency for trying times, while others vehemently disagree.
Satoshi Nakamoto himself wanted for Bitcoin to become a new global currency, so it should be possible. While it has great qualities — it is sovereign-less, trustworthy, and algorithm-based — it also has some critical drawbacks, such as having a finite supply and high volatility, making it less than an ideal option.
That would be a ‘no’ on whether or not Bitcoin could become a global reserve currency. It doesn’t mean that another crypto wouldn’t become one. After all, there are many cryptos out there, and they keep evolving, so maybe we would see a globally recognized cryptocurrency yet.
This concludes our musings on how Bitcoin fares in the current crisis, what similarities it has with gold, and whether or not it can replace fiat money in the future. While BTC is by no means an ideal economic tool (if something like this ever could exist), it still has a lot to offer to investors, traders, and common users.
Maybe it wouldn’t be able to replace fiat currencies, but it sure can enhance them and help you, especially in troubling times. We hope that this material was useful for you, and stay tuned for more crypto-related articles!