A vaccine against COVID-19 seems to be bad news for Bitcoin at first. In fact, this is a very bullish development for BTC.
The coronavirus pandemic initially hit all markets hard, including those for crypto-currencies. In March 2020, the BTC/USD exchange rate fell by more than 60 percent in just two trading sessions, and its decline coincided with a crash on the global financial market.
Later, central banks reacted by lowering key interest rates, combined with programmes that endlessly bought up government and corporate debt. The pseudo-quantitative easing, followed by governments‘ decision to spend trillions of dollars on their welfare programmes, reduced the purchasing power of the US dollar.
The fall of the dollar and negative-yielding debt prompted investors to seek profits in scarcer assets, leading to a massive recovery in the Bitcoin market. Between March and now, the crypto-currency rose by more than 350 percent, reaching $19,000 for the first time since December 2017.
But the prospects for a global economic recovery are improving. In the last two weeks, three pharmaceutical companies have unveiled their respective vaccines, each of which certifies at least 90 percent efficacy against COVID-19.
The news sent Gold, Bitcoin’s main competitor, down two weeks in a row.
Surprisingly, Bitcoin (Buy now? Click here for instructions…) itself did not move any further down, partly due to its booming acceptance by major financial institutions (see PayPal). The market’s desire to re-test $20,000, Bitcoin’s previous record high, caused speculative bullish bets to rise further in both the cash and derivatives markets.
Vaccine could push Bitcoin
Recent Bitcoin investors, including financial veterans such as Paul Tudor Jones and Stan Druckenmiller, admit they are long on the crypto currency because it allows them to protect their portfolios from the dangers of dollar depreciation and higher inflation.
MicroStrategy, a Nasdaq-listed company that has replaced its $425 million cash reserves with Bitcoin, agrees.
This is because a COVID 19 vaccine would not change the policy that Bitcoin has been pushing so far. The „Fed Funds Futures Curve“ assumes that the next rate hike will take place in 2023.
Meanwhile, the US Tips 10-Year Inflation Breakeven Rate shows a continuous upward trend – indicating that the market expects higher inflation.
In short, the damage done to the economy during the lockdown will take more time to heal. A vaccine only speeds up the healing process, but also tends to push up inflation as people return to their pre-pandemic lives.
For example, the price index for private consumer spending (a barometer used by the Federal Reserve to measure inflation) was 1.4 per cent in October 2020 – just below the central bank’s target of 2 per cent.
Economists predict that it will rise to 1.7 % by the end of November 2020.
Ellen Zentner, chief economist at Morgan Stanley, expects inflation to reach 2 per cent by the end of 2022. At the same time, Joel Prakken, chief economist at IHS Markit, estimates that oil prices will rise and the dollar will continue to weaken as the economy recovers. This will also push up inflation.
All in all, the above forecasts put Bitcoin in a thoroughly bullish situation in the coming years.