Bitcoin has bounced back up a fair bit from its recent low around 12 March. But the cryptocurrency is well down from the highs of last summer. And it plunged along with other markets as the coronavirus crisis accelerated.
But why should Bitcoin escape the carnage? Just about everything has been crashing, such as shares and commodities like oil and copper. Even precious metals have fallen hard, such as gold, silver and platinum. If such traditionally safe-haven instruments haven’t risen, what chance a highly speculative market like Bitcoin?
An economic future of unknowns
The coronavirus pandemic has plunged the world into an economic future of unknowns. Many companies have been withdrawing guidance on future earnings and slashing their dividends. Traditional valuation measures don’t work very well because all investors can really go on is a firm’s historical trading and financial figures. And they are now meaningless, at least when it comes to near-term forecasting.
One of the big fears is that the ‘cure’ for the pandemic could end up damaging economies more than the direct effects of the pandemic itself. Governments around the world are broadly shutting economies down.
Meanwhile, they’ve been throwing the kitchen sink at the problem in terms of monetary stimuli, such as lowering base interest rates and stepping up programmes to purchase bonds. And with fiscal support measures too, such as the UK government’s pledge to pay 80% of wages for employees and the self-employed, if trade has been stopped by the shutdown.
But it’s very hard for me to imagine the world economy emerging from this crisis without wounds that it will carry forward into the medium and longer terms. The recently released Bank of England Monetary Policy Summary states, for example: “Given the severity of [the] disruption, there is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment.”
A massive re-set on many levels
My guess is the brains at the Bank of England have it right with that statement. And I see what is happening now as a massive re-set of many things on many levels.
For example, the restaurant sector in the UK had become over-supplied leading up to this crisis and had been struggling for some time. Many firms within the industry will likely throw in the towel now and never open their doors again. The survivors in the industry will have a shot at prospering when the new economic dawn arrives after the crisis.
But on another level, how many people will be rethinking their restaurant and takeaway habits when it’s just been implied that every meal could potentially include a serving of the next coronavirus or similar? Maybe we’ll see a renaissance of home cooking and picnicking instead!
My assumption is that the stock market will recover from this, but not necessarily in the same shape as before. Leading sectors and shares could change, and financially weaker firms will have vanished. So, I’m concentrating on building a watch list of well-financed companies with solid trading niches in their markets. And I’m also looking at managed funds alongside trackers, such as those that follow the FTSE 100, FTSE 250, the S&P 500 and many more.