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A COVID-19 vaccine looks like bad news for Bitcoin until it does.
The arrival of the new coronavirus pandemic was initially worse for every market, including cryptocurrency. The BTC / USD exchange rate fell more than 60% in just two trading days in March 2020, its decline coinciding with a collapse in the global financial market.
Subsequently, central banks reacted by reducing benchmark lending rates, coupled with programs that endlessly bought government and corporate debt. Pseudo-quantitative easing, followed by governments’ decision to spend trillions of dollars on their welfare programs, has reduced the purchasing power of the US dollar.
The decline of the greenback and negative yielding debts have prompted investors to seek profits in scarcer assets, leading to a massive recovery in the Bitcoin market. Between March and today, the cryptocurrency rose by more than 350 percent, reaching $ 19,000 for the first time since December 2017.
Bitcoin hit a new yearly high on increasing safe haven attractiveness on Tuesday. Source: BTCUSD on TradingView.com
But the prospects for a global economic recovery are improving. The past two weeks have seen three pharmaceutical companies invent their respective vaccines, each claiming at least 90% effectiveness against COVID-19. The news sent gold, Bitcoin’s main rival, down for two weeks in a row.
Surprisingly, Bitcoin itself hasn’t moved to the bottom, aided by its growing adoption among traditional financial houses (read PayPal). The market’s desire to retest the $ 20,000 test, Bitcoin’s record to date, has kept speculative bullish bets higher in both the spot and derivatives markets.
The vaccine claims inflation
The latest Bitcoin investors, including financial veterans like Paul Tudor Jones and Stan Druckenmiller, admit they have long been on the cryptocurrency due to its ability to protect their wallets from the dangers of dollar devaluation and higher inflation.
MicroStrategy, a Nasdaq-listed company that has replaced its $ 425 million cash reserves with Bitcoin, believes the same.
It’s because a COVID-19 vaccine doesn’t promise to reverse the policies that have so far cracked down on demand for Bitcoin. The Fed Funds Futures curve predicts the next rate hike to occur in 2023. Meanwhile, US Tips’ 10-year break-even inflation rate shows a continuous uptrend, suggesting that the market expects higher inflation .
US Tips 10-year break-even inflation rate. Source: FRED
In short, the damage taken to the economy during the lockout period will take longer to heal. A vaccine simply accelerates recovery, but it also tends to increase inflation as people return to their pre-pandemic lives.
For example, the Price Index for Personal Consumption Expenses, a barometer the Federal Reserve uses to measure inflation levels, stood at 1.4% in October 2020, just below the 2% target. of the central bank. Economists predict it will rise to 1.7% by the end of November 2020.
Meanwhile, Ellen Zentner, Morgan Stanley’s chief US economist, predicts inflation will hit 2% by the end of 2022. At the same time, Joel Prakken, US chief economist at IHS Markit, suggests oil prices would rise and the dollar would cause it to weaken further due to the economic recovery. It will also push inflation higher.
Overall, the above forecasts put Bitcoin in a decidedly bullish space for years to come. A vaccine simply triggers inflation, allowing multiple institutions / investors to trade their cash for cryptocurrency.
