The madness of the financial markets does not stop. Amid panic at the dangers of another wave of coronavirus, investors and ordinary people are looking to make all kinds of predictions to know what to do with their money. Especially, considering that it is worth less and less due to inflationary policies.
Investing and saving are the two options that come to mind. But given that in most cases the returns on savings accounts are lower than the inflation rate, the most obvious option left on the table is to invest… but in what?
When it comes to investing or gambling in the VIP Roof Top Room, a fundamental rule must be considered: the greater the possibility of return, the greater the risk that is run. And that risk implies a loss of money as well as purchasing power, which is why greater care is necessary.
The dark episode of COVID-19
When COVID-19 cases exploded, panic in the markets caused one of the biggest drops in the biggest financial indices. The Nasdaq, the SP500, the Bovespa, the Ibex, the Nikkei; none were saved… and Bitcoin did not escape that black March, with the most important fall of the year.
Why? Investors realized that a border closure, a quarantine that limits the production capacity of companies and social benefits policies could slow down the markets and generate losses in the industries: if there is no one to sell to, there is no profit.
At that time, Bitcoin was highly correlated with the SP500. However, after the pandemic, the token began to cease to be seen as an investment. It was seen as a protection asset… then the era of correlation with gold began.
Bitcoin gold correlation
The correlation of Bitcoin and gold peaked with the rise of the pandemic, then fell, but has risen again since July.
Why did gold triumph where stocks failed? Basically because of the shortage. Saving does not make sense because inflation “kills” purchasing power, investing is difficult because markets are losing money. Then it is necessary to acquire goods whose value is maintained over time no matter what happens in the markets, and both gold and Bitcoin fulfil that function.
How will markets react once the COVID-19 pandemic dissipates?
A very common question from the market is what will happen in the future when COVID-19 is brought under control? This question has been the subject of debate.
Assuming a ceteris paribus scenario (everything remains the same except the coronavirus variable) it is very likely that the value of the hedging assets will decrease as investors will again seek to generate money instead of simply protecting it.
In this case, they would probably sell Bitcoin, gold or silver to invest in the stocks of healthcare companies that would undoubtedly benefit from the sale of the vaccine, or perhaps they would invest in other industries that would be revived.
But would that imply a “crash” of the bitcoin or gold markets? Probably not. The monetary policies implemented recently have taken care to ensure that it is still important to the protection of property.
And from the point of view of Bitcoin, it has behaved well with two relatively contradictory natures: investment and protection.
The dual nature of the Economy: is it “Bitcoin vs Gold” or Should it be “Bitcoin and Gold”?
In economics, there are two types of fundamental relations of goods: two goods are substitutes when one is acquired because the other loses attractiveness, for example: in summer, the purchase of bikinis increases because the purchase of sweaters decreases, while they will be complementary when the increase of one increases the value of the other, for example, an increase in the rate of smokers will probably increase the consumption of lighters.
In this case, in a bear market, Bitcoin and gold are complementary. It seeks to counteract the risk of one by opening a position with the other. However, in a market, the relationship between Bitcoin and the stock market takes on this nature. For its part, the relationship of the stock market and hedging assets is why gold tends to be a substitute.
Bitcoin and gold: Bitcoin has a malleable nature and it may not be entirely fair to put it into some category as it does not fully emulate any other asset in the world.
Bitcoin beyond COVID-19
The economy is not perfect and there are many variables. Perhaps the global crisis was not caused by the coronavirus but was simply catalysed by it. If things are like this, then a COVID cure will not change the situation, but will simply ease the fall.
And in this case, Bitcoin would be excellent to ride the wave and cushion the subsequent fall in case governments do not decide to change the essence of their policies.