Should I Buy Bitcoin During the Coronavirus Crisis?

Is Bitcoin a buy now, or is it too risky to bother with in this era of coronavirus-driven uncertainty?

That's the question many crypto investors are asking themselves in the wake of Bitcoin's ugly meltdown a few weeks ago. The Bitcoin price plunged as much as 51% in just two days.

For diehard Bitcoin enthusiasts, any big pullback is typically considered a buying opportunity. But this drop coincided with a crash in the prices of conventional assets - theoretically the very justification for owning crypto in the first place.

"Surprised we're seeing the Bitcoin price fall in this environment, would have expected the opposite," tweeted Brian Armstrong, CEO of the Coinbase crypto exchange.

But while crypto critics gloated and some Bitcoin owners no doubt had their faith tested, BTC's sudden price drop isn't as damning as it looks.

People weren't selling Bitcoin because they suddenly lost confidence in the asset. The reason had much more to do with the coronavirus-induced panic selling of other assets, particularly stocks...

Bitcoin's Plunge Explained

The explanation as to how a stock market crash could trigger a crash in the price of Bitcoin can be summed up in two words: leverage and liquidity.

It's no secret that many investors - especially large investors - use leverage to multiply their gains in a rising market. Simply put, they're borrowing money "on margin" to buy many times more shares of stock than they could pay for in cash.

This works out great when prices are going up, and it can be managed when prices are going down. But when prices suddenly go off a cliff as they did in early March, investors are put in a tough spot.

You see, brokers require investors to maintain a minimum value in their margin account. When stock prices fall quickly and steeply, it can rapidly put an account below its minimum value.

At that point, the broker makes a "margin call" to the investor demanding additional money or securities. If the investor lacks the cash to do this, brokers can compel the investor to sell other assets regardless of price to bring the account back up to the minimum value.

This "liquidity crunch" will send an investor looking to sell other assets to raise the needed cash. Those assets often include things otherwise considered safe havens, such as gold - and Bitcoin.

"A liquidity event in equities will likely translate into worsening liquidity conditions in crypto because market participants will be forced to adjust their portfolios and deal with margin calls, alternative assets are unlikely to be prioritized," Denis Vinokourov, head of research for London-based digital asset firm Bequant, told Forbes. "The same goes for commodities such as oil and gold."

When you look at how both gold and Bitcoin behaved at the peak of the sell-off, it becomes clearer that this episode is more of a hiccup than an indictment of BTC as an investment.

Bitcoin and Gold Are More Alike Than Different

From the time stocks started plunging dramatically March 9, gold fell about 15% while Bitcoin dropped about 50%.

That's quite a difference, but gold has the benefit of earning investors' trust over thousands of years. Bitcoin, at just a little over 10 years old, has not had time to prove itself and is often volatile.

Traders that have been investing in Bitcoin for the past few years see it as an alternative asset that carries much more risk than gold. So in a liquidity crisis it makes sense that Bitcoin would take a much bigger hit than gold.

Still, it's telling that an acknowledged safe haven like gold fell as much as it did when the equity markets were under stress.

What's also interesting is how both assets bounced back. From that March 9 starting point, gold has recovered more than half its losses but is still down 6.5%.

Bitcoin has also recovered more than half its losses taken since that day, and it remains down about 20%.

This chart of both assets shows how similarly they behaved:

This episode provides some useful lessons. It tells us Bitcoin does behave as a safe haven, just not to the degree gold does. And it tells us we could see a repeat of this pattern the next time stocks suddenly take a major nosedive.

It doesn't change the powerful investment case for Bitcoin.

In fact, the devastating impact the coronavirus is having on the economy is making the argument for owning Bitcoin even stronger...

Why You Should Buy Bitcoin During the Coronavirus Crisis

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With much of the economy shut down, the federal government is taking extraordinary action to keep both citizens and businesses afloat until life returns to normal.

Congress has already approved a $2 trillion relief package. And it's now looking at crafting an infrastructure bill that would also cost $2 trillion.

The total - about $4 trillion - is 85% of the annual federal budget for 2020. And that budget had a $1.1 trillion deficit. Now we're looking at a $5 trillion deficit that will balloon the $23.6 trillion national debt by 25% in one swoop.

And that's not including the actions of the U.S. Federal Reserve. The Fed has slashed interest rates to near zero and vowed to ramp up its buying of Treasuries and mortgage-backed securities. The central bank is expected to add as much as $4 trillion to its balance sheet - stacked on top of the $4 trillion left over from its actions taken during the 2008 financial crisis.

That's a lot of borrowing, and it will ultimately serve to devalue the U.S. dollar.

Bad for the dollar, but good for assets like gold and Bitcoin, which rise as the dollar loses value.

It's no accident that the prices of both Bitcoin and gold spiked when the Fed announced its plans.

Meanwhile, other nations are also borrowing and spending - and debasing their currencies - to cope with the economic impact of COVID-19.

"If there was ever a time - debasement of fiat currencies, monetization of trillions of dollars of debt, this is the time for Bitcoin," Mike Novogratz, chief executive of Bitcoin hedge fund Galaxy Digital, told CNBC.

More Reasons Bitcoin Is a Buy

In that respect, the decline in the Bitcoin price represents a chance to snap it up at a discount. At about $6,800, BTC is down 36% from its 2020 high of $10,598 and 66% from its all-time high of $19,891.

And beyond the immediate catalysts, we still have all the long-standing reasons why the Bitcoin price is likely to go as high as $100,000 over the next couple of years.

Technologies like the Lightning Network, which improve Bitcoin and make it easier to use, continue to advance.

And the big investors who abandoned Bitcoin in the recent liquidity crunch will come back when the markets eventually settle down. Crypto is a new asset class, and Bitcoin is the cream of the crop.

Finally, the halving of the block mining reward in May will reduce the supply of new bitcoins by half. Over time, this reduction, combined with rising demand, will drive Bitcoin higher.

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Follow me on Twitter @DavidGZeiler and Money Morning on Twitter and Facebook.

About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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