Bitcoin Market Sentiment: How BTC Price Action Unfolded in the Wake of the European Debt Crisis

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There appears to be increasing anxiety in the cryptocurrency markets after Bitcoin failed to stay above the 10,000 level in February. The disappointment came just less than three months ahead of the highly-anticipated Bitcoin halving.

Although Bitcoin has been holding its 21% QTD gains after the February rollercoaster ride, recent macro events looming in both traditional and crypto markets are adding an extra layer of uncertainty. However, when we look back in time, investors can find that the current market conditions are somewhat similar to 2012.

2012 and 2020 are both Bitcoin halving years with global crises and turbulent equities markets. Can history reveal more details about the pre- and post-halving from a macro perspective?

Virus-driven sell-off

February was a tough month for the cryptocurrency markets. With the escalating fears of the coronavirus outbreak, BTC prices plunged from $10,400 levels in the middle of the month and closed at the $8,500 area by month-end. The risk-off sentiment was also high in the global equities markets. The Dow registered an 1190-point drop on February 27 before the initial rebound occurred, the worst one-day point drop in history. Commodities also took a hard hit, with U.S. West Texas Intermediate (WTI) dipping below $50 a barrel.

On the other hand, the demand for a safe haven surged, as the 10-year Treasury note touched a record low of 1.03% at one point before settling down at around 1.08%.

Meanwhile, the broader market reaction seems to have painted a bleak picture without any immunity for the cryptocurrency markets. Some are questioning Bitcoin’s safe-haven feature as it seems to have failed as a hedge against uncertainties.

Find yourself back in time

The upcoming Bitcoin halving remains the primary focus for most of the crypto watchers despite the recent global market turmoil. Perhaps we can look of the year 2012, when Bitcoin had its first halving and, at the same time, markets were in the middle of another turmoil: the European debt crisis.

It started in 2009. Some EU member counties were unable to refinance their government debts, and a few states were unable to bail out their deeply indebted financial institutions without help from the European Central Bank or the International Monetary Fund.

Of course, the overall equities markets and the cryptocurrency space in 2012 were very different from what we have today. However, the risk-off sentiment, the pessimistic outlook, and fears of a recession are comparable.

Interestingly, Bitcoin jumped about 160% in 2012 on the back of the Eurozone debt crisis, and most of the gains happened before the first halving. The profits were even more noticeable in the year after the halving. In comparison, the S&P 500 gained 14.5%, and the Euro Stoxx 50 jumped about 11.2% in 2012.

It’s a currency matter after all

We keep highlighting the store of value nature of Bitcoin and believe that Bitcoin is an ideal hedge against inflation because of its limited supply. In other words, Bitcoin could be a good hedge against fiat currency depreciation.

The European debt crisis was centered on the structural problems of the financial system and the easy credit conditions back in the early 2000s. As a result, it led to a massive bailout program and the lowering of interest rates. These measures caused a significant depreciation of the euro. In late 2011, EUR/USD was traded at above 1.4. By mid-2012, EUR/USD already dropped to the 1.20 area before rebounding to 1.3.

The debt crisis resulted in some significant currency depreciation, and Bitcoin reacted to that depreciation in 2012, even before the first halving event took place.

Now, considering the ongoing uncertainties related to the coronavirus, market conditions are fundamentally different from the debt crisis. Yet, what the market is experiencing is somewhat similar to what we experienced in 2012. We believe that markets should focus more on how policymakers react to the outbreak and the resulting economic consequences.

The US Fed issued a half-point rate cut as an emergency measure. The US Dollar Index has dropped from the upper 99 handles to the low 97 areas. Markets expect the Fed will slash the rates further in the March policy meeting. At the same time, the easing narrative from other major central banks has emerged very quickly. Those shifts could cause pressure on G10FX, and that could be an additional benefiting factor for Bitcoin prices over the medium/long term.

When it comes to halving…be patient, remember?

In our previous publication Bitcoin Halving: The Time to Get in Bitcoin?, OKEx Quant pointed out that the price rise of Bitcoin after halving has a tendency to prolong every time, and this market cycle is not expected to complete until 2022. Although recent price action may not look so bullish, OKEx Quant believes that the market remains at an ideal HODL-ing period presently. Long-term investors probably need to be more patient to see the results.

Conclusion

The Bitcoin market was still tiny when the European debt crisis erupted, and it’s still relatively small today comparing to other major asset classes. Bitcoin and cryptocurrency may not be the best instruments to hedge against a global-scale recession, as Bitcoin HODLers could liquidate the holdings to compensate their losses in other assets or repay their debts. However, when a crisis comes and policymakers tend to resort to easing, Bitcoin could be an ideal hedge against currency devaluations. The global market developments in this pre-halving period could be essential for all the crypto investors, and how it unfolds could be a dominating factor in terms of future crypto allocations.

This post originally appeared on OKEx Academy.

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