Topic: [2020-04-26] Global Deflation May Not Be Bad News for Bitcoin (Read 390 times)

Well, I accept that. I'm not in a position to have the right to question this tool, I don't have enough knowledge for that. I'm just trying to understand, being a newbie in this field, why there are such loose requirements for two graphs to be called having "very high correlation"? I mean, is it intrinsic to economy in particular? Because in other fields those two graphs, for DJI and BTC-USD, would be called having Low Positive Correlation, at best.

@Betwrong. However, the small differences does not cancel figmentofmyass' reply and the % of correlation shown to you. 84.2 is very high, I reckon.

https://unicornbay.com/tools/asset-correlations

It is the data that matters.

But if there is a "very high correlation", what does it tell us about the Dow Jones then? Is there the same volatility among the largest companies' stocks performance?

Also, I thought we could call it a correlation if DJIA went deep down in the beginning of 2018, and never fully recovered the same year and the year after that. But that's not what were happening to DJIA:



Yes, that tool from above is saying that there is a high level of positive correlation, but why can't we see it comparing the charts?

@Betwrong. There is no some correlation between bitcoin and the Dow Jones. There is very high correlation between bitcoin and the Dow Jones. If you ask yourself why and be honest with yourself, you would accept the argument that bitcoin is indeed being used predominantly as a speculative asset. This implies pumping and dumping by whales on leverage, tether printing to manipulate price, clickbots on social media to create and control the storyboards.

Also many others that JK Rowling can write stories about hehehe.

something to consider is that correlation =/= they have the same returns. bitcoin obviously has much higher upside potential because the supply is so scarce and the market is so illiquid.

the correlation won't hold forever either. who knows where all this money printing will lead? runaway inflation could cause a big separation of "soft assets" like stocks and "hard assets" like gold and bitcoins.

Thank you! To be honest, I had no idea about those tools.

So, there is some positive correlation between BTC's and some other top assets' performance.

But now I am a bit confused. Does it mean that people who want to diversify their investments won't be looking into Bitcoin's direction because they should rather be investing in asset classes that demonstrate little or no correlation to one another?

you really don't see it?

okay, let's try something else. asset correlations are measured on a scale of -1 to 1, with 0 indicating no correlation. 0.7-1 indicates a high level of positive correlation.

this is BTC-USD compared with the dow jones:



https://unicornbay.com/tools/asset-correlations

I tried to find a correlation between Bitcoin and stocks, but I failed.

Here's 10 years price chart

for AAPL:



for GOOGL


Dow Jones - 10 Year Daily Chart:


To be honest, I see little to no correlation with the Bitcoin price here. But maybe I'm looking in the wrong places?

that's arguable. bitcoin and stocks rose together in a decade-long bull market. they crashed together this year. ever since then, they have become correlated assets.

it's not necessarily that bitcoin follows stocks. they are both viewed as risk assets, and investors are probably reacting to the same macro fundamentals. an economic crash and recession means institutions switching towards risk-off investments/cash and retail investors losing jobs, making them more likely to sell and less likely to invest.

i don't think they'll keep moving together forever, but it might keep up for a while as long as there is so much economic uncertainty ahead.

@Betwrong. It will considering that bitcoin is used substantially as a speculative investment by many than a type of currency for daily purchases. Observe how the price pumps and dumps on the exchanges.

Bitcoin has always been a roller coaster ride. But from what I remember its price was never dependent on what was happening in the world of stock markets. Many people predict its price will rise amid the overall economic depression, but I think it can either rise or fall independently. Events that are happening in the world of crypto are much bigger factors than anything else in this regard.


Right, but will Bitcoin price be influenced by all of that is a big question.

Yes of course. Cryptocoin markets and others like the stock market and the real estate market should stagnate during a period of high unemployment, low GDP and recession.

Also, yes, the present situation might not be the worst yet. However, we might be in this situation similar to the 2 years before the 2008 housing debt crisis in America. Those 2 years before were pumping the markets of no strong economic fundamentals. This is not sustainable.

there are a few possibilities that stick out in my mind:

1. too much uncertainty in the markets. the market isn't sure if we're recovering or entering a depression, or somewhere in between.
2. deflation = prices down, but many believe the money supply inflation (printing) will outweigh the effects of deflation.
3. markets are not always efficient, meaning they can be very irrational. smith and keynes were big believers in the idea that irrational behavior has a significant impact on markets. even if the above theory is correct, it may take the market a while to realize it.

enjoy the roller coaster ride.

So, according to you, Bitcoin price should stagnate when the overall economic activity is slow? Aren't we seeing a different picture on the crypto markets today? Or is it because the economic activity isn't slow enough still, and the times described in the article are yet to come?

@capn. It might affect it if bitcoin will continue to be used only as a speculative investment. The cryptospace would be lucky to be supported similar to the fiat printing bailouts hehehe.

However, how long would this be sustainable without a healthy economy?



According to data from Finanso.se, the market cap of the five banks combined fell from $407.44 billion at the end of December 2019 to $240 billion at the end of March 2020.

The largest bank in Europe, HSBC, alone fell by $47 billion in this time frame, to $114.08 billion. French bank BNP Paribas also lost 40% of its market cap; it fell from $74.03 billion to $42.62 billion.

Banco Santander, the third largest, lost 44% of its market cap in the first quarter of 2020. It fell from a market cap of $66.96 billion at the end of December to $37.55 billion at the end of March. Its net profit fell by 82%.

And Lloyds Banking and ING Group, the fourth and fifth largest banks in Europe, lost over 50% of their market caps. Lloyds fell from $57.97 billion to $26.59 billion, and the Dutch bank, ING Group, fell from $46.96 billion to $20.07 billion.

This is all down to the coronavirus pandemic, which toward the end of the first quarter of 2020 strongly affected Europe. Spain, Italy, the UK, France and Germany are among the worst affected countries in the world, surpassed in infections and deaths only by the US.

Source https://decrypt.co/27698/banks-face-huge-losses-due-to-coronavirus

It might be because the writer of that article also understands and accepts that bitcoin is usually only used as a speculative investment today. In a condition of economic deflation, the velocitiy of money is down, the amount of money every that human being owns is low and economic activity is also very slow.

for short term hedging against crypto market volatility. that's why there is $3 billion in stablecoins sitting on exchanges. https://twitter.com/twobitidiot/status/1250979847536590849

those stablecoin holders obviously don't want dollars in their bank account. it's mostly dry powder waiting to buy back into bitcoin or other cryptocurrencies.

one of the narratives explaining quickly growing stablecoin supplies is their rising popularity for cross-border remittance, especially in china. bitcoin bear markets and general market uncertainty have made stablecoins attractive for some. https://www.coindesk.com/tether-usdt-russia-china-importers

This is a good point:  what would you want a stable coin to be stable against? 

Why though, would you want something that is stable with fiat which is inherently unstable over any longer period of time?  Why would you take one of crypto's strongest selling points - protection against the instability of fiat due to the whims of people/politicians - and neuter it?  Why duplicate the weakness of fiat in crypt when you can just purchase a basket of fiat currencies without the overhead of crypto?

To me it sounds like the illogic of having a centralized crypto, which is pointless, one might as well just use a database.

I understand this, but why should we imply that Bitcoin price would stagnate during this time? We all know that Bitcoin price doesn't depend on the events in the physical world, and that's why it's so unpredictable. The purchasing power of 1 BTC can rise 100% in a matter of weeks, or drop 50% in the same time-frame. The effect of fiat deflation/inflation on the Bitcoin purchasing power is so negligible that we can safely ignore it.

That statement is speculating that despite the economy might contract, the purchasing power will rise because it is the price of items sold that are going down.

However, this would also imply that there might be less people holding the coin and less people spending their coins. This will also end in low adoption, more business closures and failures.

We witnessed a unique situation: COVID-19 and a critical drop in oil prices.
Oil prices will not soon recover to their previous level. The tanks facilities are overflowing with cheap oil.
Against the background of this situation, deflation is developing.
Enterprises will be closed. Waiters and drillers will remain without work.
And deflation will smoothly turn into inflation.

Despite the difficult situation and huge debt, the US economy will not collapse.
Too many things are connected with it.
Therefore, the global economy needs an alternative solution.
And cryptoeconomics, which is actively developing, is one of such solutions.
During all crises, as a rule, gold behaves well, and since bitcoin is somewhat close to gold, therefore it will behave well both during deflation and during inflation.

I think, now, it would be nice to find a solution to a true stable coin.
Many projects try to tie a stable coin to a specific currency. And this is a wrong decision.
A stable coin must be a certain constant or similar to π (3,14).
Perhaps this should be the arithmetic average of several known currencies(usd, euro, jpy, cny, rub, indian rupee ....).
And then cryptoeconomics will take its next step.

I never said statement is wrong. I am just saying that statement doesn't make any sense. All goods/things/securities/assets can be valued in terms of fiat money (in this case, USD). The value of each of these in terms of USD fluctuates at different rate at different times. One item may rise at higher rate than the other item but it doesn't mean that the purchasing power of first item has increased too. Not everything is capable of being used as a medium of exchange. Cryptocurrencies are usually viewed as securities/investment/asset rather than the currency. Even though price of let say, Bitcoin doesn't fall as much as the prices of general commodities, it doesn't mean I can directly spend Bitcoin to buy comparatively more goods and services. I still have to convert my Bitcoins into fiat to spend value. So in short, why not convert cryptocurrencies in fiat now? I will have more fiat money compared to the case where I convert my Bitcoin to fiat later. That's why I am saying that the statement that Bitcoin will keep up its PP even though its price fall shouldn't be taken as positive by crypto investors.

I don't think that statement is really wrong, if you thin about the value of Bitcoin it is always based in it's fiat value like the USD thus in turn also making it's purchasing power bigger since it's dollar value have also increased in purchasing power. Bitcoin does not need to be directly used in terms of being a payment option for it to have an increased in purchasing power, as long as deflation exists and other payments has USD value in it they will also benefit in increase in purchasing power it is simple as that.

LoL! This is the first time I read someone talking about the purchasing power of cryptocurrency. How many people use cryptocurrencies as currency when compared to investment? 2 percent? 5 percent? The article in short discussing the scenario that I can buy 5 lollipops with 0.0001 BTC instead of 4 just because the fall in Bitcoin's price in terms of USD will be less than the rate of deflation in USD. 

This doesn't make any sense. I don't know whom this article is trying to give sigh of relief but it is common phenomenon that people move towards safer investments (in terms of volatility) like Gold or keep money in fiat currency during pandemic. Bitcoin never proved itself in any crisis before so we can't simply predict how it gonna perform in coming days. It fell by approx 40% during the first wave of Corona and still trying to recover from that fall.

Deflation is a short term phenomenon,while inflation is mostly a long term process.
The USD printing by the Federal reserve system created inflation across the financial asset markets(price bubbles) during the last 15 years,while the inflation across retail markets was really low.
I guess that we won't see retail deflation and the financial asset prices will start to recover after 2021.
All the predictions about a deflation being a good thing for Bitcoin are just some completely wrong assumption,made by some wannabe analyst and published as a clickbait article online.

I don't get the logic behind the statement below:


What are the reasons for Bitcoin price to stagnate, in the first place? If cash is getting more value, then some of Bitcoin holders, even some whales maybe, can start exchanging their BTC for cash, and the BTC price can start dropping because of that. (Not saying that this is what going to happen, though. With trillions of newly printed USD, hardly it will start getting more value/purchasing power).

stagflation, deflation, hyperinflation, strong recovery..... each scenario has plenty of people betting on it.

i'm happy to be sitting on both bitcoins and cash. i have no idea what's gonna happen over the next while. the comparisons to the great depression are sorta disconcerting.

I reckon the writer of the article never considered what occurs in a global deflation. What really will occur is stagflation. Where cash will also not be king.

I didn't read the article (sorry), but it seems to me that deflation, by definition, can't be good for the price of a bitcoin. No matter how you spin it, deflation means that the values of assets (including Bitcoin) fall compared to the currency.

Maybe the article's whole point is based on this statement:

The article's author maybe inferring to Bitcoin's dollar value having more purchasing power as the dollar's purchasing power itself is rising that's why Bitcoin is "benefiting" from this deflation. However this will all depend on whether or not this deflation we are facing right now is due to economical growth or the pending economical stagnation we will be facing, my guess is it is the latter. Deflation is simply a decrease in demand for goods in a certain economy, it will always be cause of the supply being greater compared to demand it is having. The supply of goods growing while other economical factors are running in the same direction will mean that the deflation is good, however in the situation we are currently facing which is the pandemic the oversupply of goods we have is not caused by the economy operating but it being in a standstill. How can people be the demand if majority of them are staying in their houses? How can the prices of oil go up when simply there are a few cars being driven? These are just two questions/examples why the deflation we are facing now isn't good but rather might be start of the recession a lot of people are talking about.

It seems to be an open question as to whether this will be a deflationary, an inflationary environment, or something not particularly different than the past few years.  I know some high value investors are betting on deflation, while some are betting on inflation, there is someone on each side of the trade.  I don't think anyone *knows* but a lot of people think they are right, and half will be. 

As far as its impact on bitcoin, the next halving, technology improvements, usage, etc will have a lot larger impact on the fiat price of bitcoin that inflation or deflation.

doesn't that assume bitcoin's price vs dollars won't ever drop during this "aggressive economic deflation"? if investors and consumers have less money to spend and they want to hold dollars, won't this dynamic pressure bitcoin prices down?

However, does the American dollar follow normal rules? The Federal Reserve have printed trillions more of their currency and putting the American citizens more under debt but the American dollar have risen against all the other currencies.

Why Global Deflation May Not Be Bad News for Bitcoin

Contrary to expectations, bitcoin could see a positive performance during a possible bout of global deflation if it acts not just as an investment asset, but as a medium of exchange and a perceived safe haven like gold.

The top cryptocurrency by market value is widely considered to be a hedge against inflation because its supply is capped at 21 million and its monetary policy is pre-programmed to cut the pace of supply expansion by 50 percent every four years.

As such, one may consider any deflationary collapse as a price-bearish development for bitcoin. Talk of deflation began earlier this month after the U.S. reported massive job losses due to the coronavirus outbreak. The prospects of a deflationary collapse have strengthened with this week’s oil price crash.

“The oil price rout will send a deflationary wave through the global economy,” tweeted popular macro analyst Holger Zschaepitz on Tuesday.

Cash typically becomes king during deflation because the drop in the general price levels boosts the monetary unit’s purchasing power, or the ability to purchase goods and services.

“Unlike inflation, when people try to get out of the dollar because it's losing value, during deflation people are more comfortable with the dollar because its value is going up,” said Erick Pinos, ecosystem lead for the Americas at the public blockchain and distributed collaboration platform Ontology.

The rush for cash, however, may not have a substantially negative impact on bitcoin’s price because deflation would also boost the purchasing power of the cryptocurrency.

<......>

CoinDesk