Posted on April 14, 2020
When excess liquidity still pays off
It was the biggest price drop in bitcoin’s recent history. In just two days, over the 12th and 13th of March, the cryptocurrency’s price fell by an incredible 50 percent. Many critics rejoiced and rubbed this in the faces of the crypto community joking that the term halvening might have been misunderstood.
Other Bitcoin-haters even went out of their way making the following argument: Unlike with traditional markets, the Bitcoin world does not know any central banks to support and backstop financial markets. In combination with governments, it was these central banks that must have been able to stop the price from further decline through their massive intervention and stimulus programs.
Hearing this type of argument a genuine Bitcoiner does not really know whether he should be laughing or crying. Deescalating and defusing a liquidity crisis by providing more liquidity is just as wrong an approach as a firefighter, who is trying to quench a blaze with kerosene.
A crisis, as any well-trained economist knows, is an inevitable corrective element. The term “crisis” is derived from the Greek and can be equated with clearing up. Thus it is the crisis that ultimately brings about catharsis, i.e. cleansing of wrongly allocated capital.
From a fundamental perspective, the Bitcoin ecosystem should be in better shape today than it was before the doomsday of March 12. The price crash has liquidated many leveraged positions that were opened on a thin basis anyway. Many investors, who lacked conviction, after all, have dumped their Bitcoin into a panic selling market.
At the lower end, when the bitcoin price fell below the $4000 mark, the so-called “strong hands” became active and collected the bitcoin at a bargain price. Although not guaranteed to one hundred percent, there will have definitely been some among these investors who understand Bitcoin as an asset very well and probably have a long-term perspective.
In a system like Bitcoin’s, in which neither governments nor central banks stand at gunpoint and try to prevent price corrections by unleashing floods of money that pale in comparison to the time of Noah’s flood, real excess liquidity saved up for times of crisis is still worthwhile. Those who can tap into this liquidity then not only stabilize the market in a natural way. It also makes the capital structure shift in an efficient and sensible way: from the less suitable hands to the more capable minds.
Cementation of inability
In our traditional world of finance, corrections, and thus cleansing, are hardly an option anymore. Any attempt by the market to adjust distorted capital, production and financial structures is nipped in the bud. This cements the many distortions and also leaves financial as well as productive resources in the hands of those who would actually be exposed as too incapable in the course of a corrective crisis.
Almost every monetary, fiscal and economic policy measure, if it is designed to prevent short-term damage, will unintentionally but undoubtedly reward an unwillingness to learn, thwart efficient structural adjustments and further undermine the sustainable foundations of what is left of today’s productivity. The spiral of intervention will continue to spin while another future crisis is inevitable.
A crisis and price collapse is always severe and has the potential to destroy capital. But ultimately it also offers actors the chance to move on to new heights under new auspices on a somewhat cleaned-up playground that has been restructured according to market forces. If the crisis is suppressed, the consumption of capital will just go on without anybody really noticing.
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