Market Panic and the Performance of Digital Money during Economic Crisis

1. The Specificity of the Current Economic Crisis

Economic crises in history often stem from purely economic issues and can usually be alleviated through economic means such as lowering interest rates and increasing the money supply. In these crises, some businesses go bankrupt while others are reborn; some people go bankrupt, while others become wealthy as a result.

However, the current economic crisis has unusual characteristics. It is not just an economic issue, but also involves an unknown health threat. In this situation, simple economic measures may not fully resolve the problem. Government statements have gradually shaken corporate confidence, even though officials are trying to downplay the severity of the epidemic.

The root cause of this crisis – the coronavirus – has exhibited worrying characteristics: a long incubation period, high transmissibility, and severe health threats. These features make it a highly destructive factor on a biological level.

In the face of this situation, some leaders and financial institutions in various countries seem to underestimate the severity of the pandemic or attempt to cover up its true impact. This attitude may stem from considerations of maintaining economic stability, but it could also exacerbate market uncertainty.

In this context, some countries' central banks have taken unprecedented aggressive measures, such as lowering interest rates to near zero. Although this approach aims to stimulate the economy, it may also be interpreted by the market as a desperate move, which in turn exacerbates panic.

2. Bitcoin: Safe Haven Asset or Risk Asset?

During this economic crisis, Bitcoin's performance has prompted a reevaluation of its safe-haven attributes. In the past, many viewed Bitcoin as a safe-haven asset, partly because it often rose in tandem with gold prices. However, in the current financial turmoil, Bitcoin's performance resembles that of a risk asset.

The price of Bitcoin shows a clear correlation with traditional risk assets (such as crude oil and stock indices), while its correlation with gold is relatively low. This indicates that during a global financial crisis, Bitcoin is more often viewed as a risk investment rather than a safe haven.

People consider Bitcoin to be a safe-haven asset mainly based on the following points:

1. The supply of Bitcoin is limited, unlike fiat currency which may face inflation risks.
2. Bitcoin is easy to manage and store, unaffected by the risks of the banking system.
3. During special periods, Bitcoin is easy to carry and transfer, which can avoid asset freezing or transfer restrictions.

However, these characteristics are not equivalent to those of traditional safe-haven assets (such as gold). Furthermore, the market's risk-hedging sentiment towards Bitcoin often differs from its actual hedging properties. During stable periods, this risk-hedging sentiment may be used for market speculation, but in a real crisis, Bitcoin's performance may be vastly different from expectations.

3. Performance of Stablecoins

During this financial crisis, the only significant increase in the digital money market has been in stablecoins, particularly a well-known stablecoin. Since October of last year, investors holding this stablecoin have maximized their profits, with prices rising by as much as 20%. In contrast, other major cryptocurrencies have experienced substantial declines, dropping approximately 25% or more from their highs earlier in the year.

This phenomenon highlights the importance of stablecoins as a safe-haven tool during periods of market turbulence. A well-known stablecoin, although not the only stablecoin in the market, has the largest market share. From its internal structure, this stablecoin is transitioning to the Ethereum network, with the Ethereum-based version currently accounting for 61.35% of its total market value and 50.99% of the entire stablecoin market.

It is worth noting that the issuing company of this stablecoin has adopted a strategy similar to that of fiat currency: increasing the issuance of money without disclosing information. Although this has raised some concerns about its transparency, this practice seems to have been tacitly accepted by the market due to its dominant position.

From an economic perspective, a moderate issuance of stablecoins does not necessarily lead to a collapse in their value, which is similar to the case of fiat currency. As long as the scale of issuance remains within a reasonable range, it can still maintain its function and value as a medium of exchange.

4. Conclusion

In the face of the current economic crisis, investors need to adjust their views on Bitcoin, seeing it as a risk asset rather than a traditional safe haven tool. Whether adopting a value investing or speculative trading strategy, this understanding is essential.

It is important to recognize that while economic crises are full of challenges, they can also provide ordinary people with rare opportunities for upward mobility. A financial crisis of this scale, like the one we are currently experiencing, may be a once-in-a-lifetime event that deserves our serious attention and deep reflection.

Finally, please remember that investment decisions should be based on individual risk tolerance and comprehensive market analysis. The cryptocurrency market is highly volatile, and it is important to remain rational and cautious when investing.