- Bitcoin failed to perform well as a hedge during the crash in March 2020.
- Stablecoins and DeFi are expanding and may become a better proxy for attracting new users to the blockchain space.
- While printing USD in March 2020 was dictated by the global market’s demand, data suggests that printing stablecoins was not.
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The blockchain space originated amid the 2007-2008 financial crisis. The genesis block of the world’s first cryptocurrency, Bitcoin, contained the message: “Chancellor on the Brink of the Second Bailout for Banks,” highlighting the broken state of the global financial system.
Bitcoin’s promise has been to provide a decentralized means for storing and transferring value with predictable issuance rules. On paper, it looked like a perfect hedge for the next recession and hyperinflation, a new “digital gold.”
However, this value proposition didn’t hold up well in practice.
Bitcoin is slow and expensive. It’s quasi-decentralized, given that just a handful of mining pools control hashrates. It doesn’t offer smart contracts. The project’s proponents often cite the stock-to-flow (S2F) model and the halving events in attempts to justify BTC’s upside potential. Still, a limited supply is only one half of price growth. The other half is sustained demand.
With Bitcoin losing its ground as a macroeconomic hedge, it may struggle to generate organic demand down the road. Meanwhile, the blockchain space evolves, and other narratives may overshadow its place as “digital gold.”
The global risk-off environment led to countries rushing to reserve currencies. Outside of governments, people are hoarding cash—even as the money printers continue to go “brrrr” in both the traditional and cryptocurrency sectors.
Stablecoins had a jump in issuance, from an aggregate market cap from around $5 billion to over $12 billion in just a few months. A surge in stablecoins suggests that people find them a better “safe haven” than Bitcoin.
Meanwhile, decentralized finance (DeFi) has been on the rise. DeFi platforms provide more attractive yields than their traditional counterparts, which are bound by near-zero interest rates.
The combination of stablecoins and DeFi instruments doesn’t leave many use cases for Bitcoin amid the global recession, especially given the scale of their recent expansion. However, data suggests that the increase in external demand didn’t trigger this expansion.
Bitcoin’s Unfulfilled Expectations
Bitcoin’s ability to act as a macroeconomic hedge has been evaluated using various approaches throughout its lifetime. The major shortcoming of these thought experiments is that there was no global recession since Bitcoin’s inception. Until now.
Klaus Grobys conducted one of the most recent studies of Bitcoin’s ability to act as gold. It uses a statistical technique called difference in differences. In its classic form, the method determines whether a…