Why Bitcoin and Stocks went Wild During a Global Recession

When historians look back on 2020 and ask what will be best known, there are two stories they could tell. On the one hand, 2020 could be defined by a planet that was rocked by a pandemic that caused millions to die, and an economic collapse that will be felt long after a vaccine was introduced.

On the other hand, historians might say that 2020 was the year for investors and their returns plummeted to the stratosphere. In particular, Bitcoin’s record-breaking price surge, and the American stock market, which has also reached unprecedented levels.

These stories are in many ways, both sides of the same coin. But what they also show is the growing rift between what’s happening in the world of stocks, shares and cryptocurrencies, and what’s happening in the rest of the economy.

In today’s Market Watch, we’ll explore why assets became bananas when many people’s lives around the world took a turn for the worse.

A brief history of 2020

The stock market boom and the rise of Bitcoin happened at roughly the same time, and for the same reasons. As COVID marches slowly around the world, between February 19 and March 23, the S&P 500 index lost a third of its value. Between February 13 and March 15, the value of Bitcoin was cut in half, from $ 10,000 – $ 5,000.

But since then both asset classes have increased. Bitcoin has now sat comfortably north of $ 16,000, and surpassed the ever-high 2017 previous set last week. At the end of November, the Dow Jones Industrial Average crossed the 30,000 mark for the first time. The Nasdaq came shortly after record-breaking, and November has been the best-ever month for global equity since 1982.

The catalyst was, and Bitcoin fans are not going to like this, the Federal Reserve’s response to what it thought was going to be a catastrophic melting down of the economy.

The Federal Reserve stepped in with a wide range of measures to limit the economic damage from the pandemic, including up to $ 2.3 trillion in borrowing to support homes, employers, financial markets, and state and local governments.

“We are using these borrowing powers to an unprecedented degree [and] … We will continue to use these powers forcefully, proactively and aggressively until we are confident that we are on the road to recovery, ” said Jerome H. Powell, Chairman of the Federal Reserve Board of Governors.

That unwavering support immediately helped investors move from panic to optimism. By the summer the markets had recovered more than half their value. The Federal Reserve’s commitment also included the purchase of corporate debt, including “junk” bonds of corporate debt that have a higher risk of default than most bonds.

In February the corporate bond market was completely frozen, but in the six weeks of May to June — after the Fed agreed to step in companies it issued $ 560 billion of bonds, double the normal level.

Federal Reserve actions, which were reflected by central banks elsewhere – though not to the same extent – prefaced a cascade of bankruptcies that might have followed as consumers were told to stay home.

Why did Bitcoin do the same? Because Bitcoin has become an asset like any other in an investor’s portfolio. While it may not be on the Fed’s list of things to help, Bitcoin has benefited from investor confidence.

Take a look at the institutional investors and blue-chip companies that have suddenly become Bitcoin’s biggest supporters. Its performance has outperformed traditional stocks and shares, but has behaved in much the same way since March this year.

While Bitcoin was built on liberal ideals, it has become an asset to hold like any other.

Another 2020 story

At the same time all this has been happening, COVID worked its way through every country around the world. At the time of writing, more than 1.5 million people had died, with 65 million confirmed and rising cases.

The impact on the global economy was nothing short of shocking. Global economic output fell by 4.4%. If you just look at developed economies that number is growing to 5.8%

In the UK, GDP fell by 25% in April. In America, the blow to jobs has been brutal, with unemployment rising from 4% to about 16%, the highest rate since records began in 1948. It was a similar story worldwide.

The furlough schemes employed by governments were extensive. In the UK 19% of the workforce was restrained, in Germany 23% and in France that number increased to 41%. The governments have been borrowing at levels not seen since World War II.

The International Finance Institute recently reported that the ratio of global debt to gross domestic product will rise from 320 per cent in 2019 to a record high of 365 per cent in 2020.

What we’re seeing is that while large company shares have risen thanks to help from the Fed, small businesses are struggling to get cash from Uncle Sam. Why?

The long divorce between Wall Street and Main Street

During the 1950s, the fortunes of large companies and the fate of individual consumers were much more closely aligned, for a number of reasons.

In that decade, 90% of the stock market it was held by small retail investors. When the economy did well, those companies also tended to do well, meaning their stock prices would rise. As stock prices rose, the vast majority of working Americans felt their wealth increased. The health of the two tended to move together. In 2020, things look very different. Today those retail investors are responsible for less than 30% of stock market trading volume.

While the majority of Americans (52%) own stock through investment schemes such as pensions, according to the Pew Research Center, the wealth of the rich is much more concentrated in stocks. About 88% of those earning more than $ 100,000 a year own their stock, compared to 19% of those earning less than $ 35,000.

The vast majority of all American-owned stocks are held by the wealthiest 10% of households. This poses a quandary for policy makers. If the Fed did nothing during COVID, the damage done to rich and poor alike would have been far worse.

But the helping hand, because of this divorce between the high street and high net worth individuals, has disproportionately benefited the rich. Where does Bitcoin sit in this equation?

Unregulated digital currency advocates have historically viewed Bitcoin as a potential gateway to the banking world without access to financial markets from which they were previously excluded.

But Bitcoin’s behavior, thanks to institutional investors eyeing the opportunity to limit the currency’s small liquidity supply from HODLing as much as they can get their hands on, is acting more like an asset to the rich instead of a ramp for the poor . In fact, Mastercard’s CEO said last month that Bitcoin can’t help the unbanked.

Although Bitcoin is unique in that it can hold both positions, time will tell whether the voices of economic inclusivity can be heard over the clamor of increasing profits.

What does it all mean?

There are three areas that the 2020s split will have an impact: debt, fraud, and civil unrest.

In 2019, the World Bank He said there were previous waves of debt it almost always gave rise to global financial desires, see: Latin America in the 1980s, Asia in the mid-1990s and the US housing market in the 2000s. The IIF concluded in its report on rising debt status this year that, “More debt, more trouble.”

This year’s boom was built on the backs of governments that were ready to do whatever it takes to keep the lights on. That support is limited, and if businesses – and indeed Bitcoin – can’t demonstrate value beyond being profiled, a bubble is forming that will surely burst. Now Bitcoin is different thanks to its circulating supply, and we’ll talk more about that in the long read next week. But what’s bad for business, as we’ve seen this year, is also bad for Bitcoin.

The second way this year that is likely to have an impact is fraud. Extended boots tend to encourage movement behavior, and the expansion before the covid accident was the longest on record.

We are already starting to see examples of such financial gerrymandering lately. Luckin Coffee, a Chinese Chinese wannabe, is alleged to have faked 40% of its sales and Hin Leong, a Singaporean energy trader, nearly brought the country’s energy markets down after he hid huge losses. Fraud is on the rise as boils come to an end, and major fraud or corporate collapse in America could shake up market confidence, as it did when Enron went public in 2001 and Lehman Brothers led the stock market down in 2008.

Bitcoin has a similar problem. Whenever the price goes up, the number of scams trying to attract greedy investors increases. The security company Kaspersky recently released a report suggesting Bitcoin Cybercrime a major issue next year thanks to the price boom.

The last, and perhaps most visible, problem that could occur is civil unrest. At the beginning of this year, inequality was growing to more than 70% of the global population, according to a study published by the United Nations.

The study also showed that the richest one percent of the population are the big winners in the changing global economy, increasing their share of income between 1990 and 2015, and at the other end of the scale , the bottom 40 percent earned less than a quarter of income in all countries surveyed. This year it will have exacerbated these trends.

The International Labor Organization – the United Nations agency that measures protest activities around the world – had found that social unrest had already been growing worldwide before COVID. He predicts that trend will only increase next year.

However, Bitcoin sits somewhere in the middle. While the cryptocurrency is held most fiercely in emerging economies like Turkey and Brazil – which are both struggling with their economies – it is being bought faster by corporate America.

If Bitcoin HODLers wants the good times to continue, they may have to contend with the idea that BTC is less of a reversible digital currency and more just another way the rich are getting richer.