- Bitcoin’s price boomed alongside global stock markets this year.
- The Federal Reserve’s support to the US economy has given investors confidence to look for new assets.
- However, an increasing amount of money held in assets has several disadvantages.
When historians look back on 2020 and wonder what it will be best known for, there are two stories they could tell. On the one hand, 2020 could be defined by a planet rocked by a pandemic that killed millions and an economic decline that will be felt long after a vaccine is introduced.
On the flip side, historians might say 2020 was the year investors and their returns soared into the stratosphere. In particular, the record-breaking price increase of Bitcoin and the American stock market, which has also reached unprecedented levels.
In many ways, these stories are two sides of the same coin. But what they also show is the growing gap between what is happening in the world of stocks, stocks and cryptocurrencies and what is happening in the rest of the economy.
In today’s Market Watch, we’re going to explore why assets turned into bananas as the lives of many people around the world deteriorated.
A brief history of 2020
The stock market boom and the rise of Bitcoin happened around the same time and for the same reasons. When COVID slowly marched around the globe between February 19 and March 23, the S&P 500 Index lost a third of its value. Between February 13 and March 15, the value of Bitcoin was halved from $ 10,000 to $ 5,000.
Since then, both asset classes have skyrocketed. Bitcoin is now conveniently north of $ 16,000, surpassing the previous all-time high of 2017 last week. At the end of November, the Dow Jones Industrial Average passed the 30,000 mark for the first time. The Nasdaq came just after breaking the record, and November was the best month for global stocks since 1982.
The catalyst was, and Bitcoin fans will not like this, the Federal Reserve’s response to what it believed was a catastrophic economic collapse.
The Federal Reserve has taken a wide range of measures to limit the economic damage caused by the pandemic. including up to $ 2.3 trillion in lending to support households, employers, financial markets, and state and local governments.
“We are using these lending powers to an unprecedented level [and] … Will continue to use these forces vigorously, proactively and aggressively until we are confident that we are on a solid path to recovery. ” said Jerome H. Powell, Chairman of the Federal Reserve Board of Governors.
This unwavering support helped investors move from panic to optimism immediately. By the summer, the markets had regained more than half their value. The Federal Reserve’s exposure also included buying corporate bonds, including high-yield “junk” bonds – corporate bonds that have a higher risk of default than most bonds.
The corporate bond market was completely frozen in February, but in the six weeks from May to June – after the Fed agreed to invest in companies – $ 560 billion in bonds were issued, double the normal rate.
The actions of the Federal Reserve mirrored elsewhere by central banks – albeit not to the same extent – prevented a cascade of bankruptcies that could have followed when consumers were asked to stay home.
Why did Bitcoin do the same? Because Bitcoin has become an asset like any other in an investor’s portfolio. Bitcoin may not be on the Fed’s list of actions to be supported, but it has benefited from investor confidence.
Take a look at the multitude of institutional investors and blue-chip companies that have suddenly become Bitcoin’s biggest fans. Its performance has outperformed traditional stocks, but has been largely the same since March this year.
While Bitcoin was built on libertarian ideals, it has become an asset to hold like anyone else.
The other story of 2020
At the same time, COVID has worked its way through all countries in the world. At the time of writing, more than 1.5 million people have died with 65 million confirmed cases and the number of cases increasing.
The impact on the world economy was nothing short of breathtaking. World economic output fell by 4.4%. If you just look at the advanced economies that number rises to 5.8%
In the UK, GDP fell by 25% in April. In America the job losses were gruesome: unemployment rose from 4% to about 16%, the highest rate since records began in 1948. It was similar around the world.
The vacation programs used by the governments were extensive. In the UK, 19% of the workforce were on leave, in Germany 23% and in France 41%. Governments have borrowed at levels not seen since World War II.
The Institute of International Finance recently reported that the ratio of global debt to gross domestic product will rise from 320 percent in 2019 to a record 365 percent in 2020.
What we are seeing is that the stocks of big companies have risen thanks to the help of the Fed, while small companies are struggling to get money from Uncle Sam. Why?
The long divorce between Wall Street and Main Street
In the 1950s, the fortunes of large businesses and individual consumers were much more closely aligned for a number of reasons.
This decade 90% of the stock market was held by retail investors. When the economy did well, these companies also tended to do well, which meant that their stock prices would rise. As stock prices rose, the vast majority of working Americans felt their affluence increase. Both health tended to move together. In 2020 it will look very different. Today these private investors are responsible for less than 30% of the exchange trading volume.
While Most Americans (52%) own stocks about investment plans like annuities, according to which Pew Research CenterThe wealth of the rich is far more focused on stocks. About 88% of those who make more than $ 100,000 a year own stocks, compared with 19% of those who make less than $ 35,000.
The vast majority of all American-owned stocks are owned by the wealthiest 10% of households. This is a dilemma for policy makers. If the Fed had not done anything during COVID, the damage done to the rich and poor would have been far worse.
But the bailout has helped the rich disproportionately because of this divorce between Hauptstrasse and wealthy private individuals. Where does Bitcoin sit in this equation?
Historically, advocates saw unregulated digital currencies Bitcoin as a potential gateway So that the world’s non-banks have access to the financial markets from which they were previously excluded.
However, thanks to institutional investors considering the option of HODLing the currency’s low supply of liquidity as much as possible, Bitcoin is behaving more like an asset for the rich than an upswing for the poor. Indeed, the CEO of Mastercard said last month Bitcoin can’t help the unbanked.
While Bitcoin is unique in that it can hold both positions, time will tell if the voices of economic inclusivity can be heard over the cries of rising profits.
What does it all mean?
There are three areas that the 2020s split will have an impact: debt, fraud, and civil unrest.
In 2019 the World Bank said that earlier waves of debt almost always led to global financial collapses, see: Latin America in the 1980s, Asia in the mid-1990s, and the US housing market in the 2000s. The IIF concluded in its report on the status of rising debt this year that “More debt, more trouble.”
This year’s boom was built on the foundation of governments willing to do whatever it takes to keep the lights on. That support is limited, and when companies – and indeed Bitcoin – can’t show value beyond supporting, a bubble forms that is sure to burst. Now Bitcoin is different thanks to its circulating supply, and we’ll talk more about it over the next week. But what’s bad for business, as we’ve seen this year, is bad for Bitcoin too.
The second path this year is likely to impact is cheating. Extended boom tend to encourage shady behaviorand the expansion prior to the Covid crash was the longest ever recorded.
Lately we have seen examples of such financial problems. Luckin Coffee, a Chinese Starbucks wannabe, reportedly made 40% of its sales and Hin Leong, a Singaporean energy trader, nearly brought the country’s energy markets to a standstill after hiding huge losses. Fraud is increasing as booms come to an endand a major scam or corporate collapse in America could shake market confidence, as it did when Enron collapsed in 2001 and Lehman Brothers led the stock market down in 2008.
Bitcoin has a similar problem. Whenever the price goes up, so does the number of scams trying to attract gullible investors. Security company Kaspersky recently published a report suggesting this Bitcoin cyber crime will be a big topic next year thanks to the price boom.
The final and perhaps most visible problem that can arise is civil unrest. At the beginning of this year, inequality was growing at more than 70% of the world’s population. according to a study published by the UN.
The study also showed that the richest percent of the population are the big winners of the changing global economy, increasing their share of income between 1990 and 2015, while at the other end of the scale, the bottom 40 percent earn less than a quarter of the income in all of the countries studied. This year these trends will have intensified.
The International Labor Organization – a UN agency that measures protest activity around the world – had determined that social unrest had already broken out grown around the world from COVID. It is Predict this trend will not increase until next year.
Bitcoin sits somewhere in the middle, however. While cryptocurrency is most strongly represented in emerging markets like Turkey and Brazil, both of which are struggling with their economies, American companies are buying it up faster.
If Bitcoin HODLers want the good times to continue, they may have to grapple with the idea that BTC is less of a subversive digital currency than another way that the rich get richer.
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