Bitcoin Safe Haven Status Under Fire Following US Federal Reserve Rate Cuts to Combat Coronavirus Disruption
Equity markets have been surging following the US Federal Reserve’s (Fed) announcement of an emergency rate cut to counter the economic disruption of the coronavirus.
The bitcoin price which had also been experiencing a recent bearish decline, also reacted to the news of a rate cut of half a percentage point from the Fed, with a sudden spike from $8400 to $8950.
The reaction of the bitcoin market to the first cut to key rates from the Federal Reserve since December 2008, during the global financial crisis, is being carefully observed by the crypto community and may eventually reveal the cryptocurrency’s true nature.
Bitcoin and Commodities
Is bitcoin a currency designed to facilitate commerce, or is it a commodity that has intrinsic value, which rises and falls according to supply and demand? This is a question that the crypto community has been asking for some time and the Federal Reserve's rate cut could provide the answer.
By cutting rates the Federal Reserve will increase the supply of money in the global market, a welcomed move by businesses everywhere. The half a percentage rate cut effectively devalues the US dollar, the de facto global currency, thus it should put up the price of commodities such as gold as the supply of gold did not increase. This should in theory also apply to bitcoin as its supply is also fixed.
Chart: The Balance Source: St. Louis Fed
The Bitcoin price did react almost immediately to the Fed’s rate cuts, shooting up almost $200 only minutes after the announcement. The rise was short-lived and the price fell immediately beginning the current cycle of volatility.
BTC USDT 1-minute chart. Source: TradingView
It should be noted that the BTC price movements since the announcement have mirrored the traditional commodities and equities markets which also spiked before plunging 2 points. Gold itself did not see a bullish price reaction to the cut but there are still many reasons gold and bitcoin could climb higher from this point.
Bitcoin Safe Haven Hedge Questionable During Outbreak
VanEck recently outlined the case for institutional bitcoin investment in a report published on Jan. 29. According to the investment management firm, even a small amount of BTC allocation could improve a portfolio's upside.
VanEck explained that BTC is not quite a currency but still has the potential to become one. The report also suggests Bitcoin bears the necessary features that could see it become a digital gold, but its future monetary value hinges heavily on how people’s perceptions of its value develop.
In a recent interview with Blockchain.News, Oleksandr Lutskevych, CEO and Founder of the CEX.IO Bitcoin exchange revealed that US investors have been looking for a bonafide store of value in bitcoin to hedge against the Federal Reserve’s quantitative easing. He noted similar sentiments in the UK during Brexit as citizens also invested heavily in bitcoin to hedge against a possible depreciation of the GBP.
As the coronavirus spread, global markets have been gripped by a ruthless sell-off, and Bitcoin has failed to serve as a store of value, which many believe should be its main use case. In fact, BTC performed worse than any traditional asset, shedding 15 per cent of its value in less than a week
Mike Novagratz, CEO of Galaxy Digital tried to shed some light on why bitcoin is failing as a safe haven in a tweet on March 1.
Novagratz wrote, “ How did BTC go from being a hedge against bad stuff to getting washed out and trading like a risk asset? When things go from bad, to very very bad like they did last week, investors take leverage down as fast as they can. They book profits to make up for other losses. Ouch.”
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