Opinion: Bitcoin will rise when it defeats the next economic crisis, but altcoins may not

As institutions line up to buy Bitcoin, Bitcoin’s origin story has come into focus. Most people believe that Bitcoin was created in response to the bankruptcy of Lehman Brothers and the subsequent global financial crisis. However, Bitcoin is the result of more than a decade of development in peer-to-peer payments. Since Bitcoin prices are driven by inflows and fluctuations in the spot and derivatives markets, many investors and traders are only looking to make a profit. However, Bitcoin maximalists and some on-chain analysts believe that Bitcoin has the potential to become a successful alternative currency.

It is interesting to see how the narrative of altcoins focuses on alternatives to Bitcoin when Bitcoin is viewed as an alternative currency. Whether or not Bitcoin is the solution to the economic crisis, it is important for retail traders to do their research before adding more of these assets to their portfolios. Smart money may be moving out faster than it is being pumped in, but retail traders need to test the waters first.

The growth of current economic assets is far from the pace of money printing by the Federal Reserve. Except for the stocks closest to the Nasdaq, the growth of other assets has not been able to keep up with the pace of the Federal Reserve throughout the entire period.

Based on year-to-date asset growth, the Fed’s balance sheet trumps everything. Bitcoin is the closest performer, with Nasdaq not far behind. Currently, Bitcoin’s inflation rate is 1.8%, and the Fed’s ideal target is 2%. The Fed sees this as the optimal level of inflation to maintain a healthy economy for many years. While the Fed achieves this goal by manipulating monetary policy, Bitcoin’s inflation rate mimics the stable inflation rate of gold, making it more reliable.

Although it may seem counterintuitive at first, Bitcoin is actually a deflationary currency. Comparing it to fiat currencies makes it an ideal hedge against inflation. According to Different Times by Reinhart and Rogoff, governments have been inflating their currencies over the past 800 years. Initially, governments would inflate their currencies by debasing gold. Then they entered the age of printing presses and began expanding the monetary base by creating money digitally and tracking it through databases. Bitcoin, therefore, is not entirely different from fiat currencies, except that the price is controlled by demand and supply rather than monetary policy.

Bitcoin's correlation with gold and the S&P 500 is higher than it was at the beginning of the year. The one-year correlation is still negative or close to zero, but it has been climbing steadily over the past 10 months. Bitcoin has the highest return on investment.

Bitcoin ROI vs. other assets || Source: Econometrics

Since 2015, Bitcoin has outperformed the top 5 indices 70 times, and while the growth in ROI this year has not been as explosive, high ROI is not the only factor in beating the next financial crisis. Bitcoin’s exchange trading volume is currently below the peak of $550 million reached in July 2020.

Bitcoin exchange volume || Source: Blockchain.com

However, the current drop in trading volume is helping to create scarcity and drive increased demand. As trading volume has fallen, inflows to exchanges have fallen below the 180-day average and have only started to rise in the past week. With institutions taking an open interest in derivatives exchanges, Bitcoin’s fundamentals are now more solid. It may be enough to solve the next financial crisis. While the price of Bitcoin may rise, the same cannot be said for altcoins, and a financial crisis could push the value of lower-market-cap coins below rock-bottom prices.