You would be forgiven for thinking cryptocurrencies would die a death during a global pandemic. Many see them as a nice-to-haves in a time of abundance – when citizens don’t need the state and are keen to capitalise on intangible ways to build value. In the face of the Covid-19 crisis, the default is that we need the state, from service provision to funding to managing the money supply, to come to our aid and remain in control.
But is that really where we’re heading?
We tend to overestimate the effects of technology and innovation in the short term and underestimate it in the long term. (Unfortunately, not my own pearl of wisdom but that of futurist Roy Amara.) Today, with stock markets and the real economy in disarray, it feels like the value of bitcoin and other cryptocurrencies just starting to be understood. This is not something that will happen overnight, but bitcoin was born out of the last financial crisis; it is likely that it will help us out of this one.
Validating the white paper
The thesis behind crypto is, you could say, very (pre-Covid) 2020. Create a decentralised, non-political, non-geographic based currency that is both digitally-encrypted and has a limited supply, as well as having the full feature set of a currency. The usefulness of these attributes has been advancing for years.
And while the need for redistribution of wealth accelerates, with democracies around the world turning to universal basic income and cash handouts, the limits of the fiat-based global financial system are thrown into sharp relief. Is crypto finally coming of age?
People have been waiting for a watershed event like this. As cashless societies get bigger and fiat currencies become increasingly manipulated, stimulus packages will weigh heavier and heavier on debt-to-GDP ratios. This is exactly what happened in the last crisis, where we saw 120% debt-to-GDP ratios. Debt servicing will be costlier, while the poorest in societies start to feel the burn of inflation, and everyone feels the burden of rising taxation and a manipulated money supply. The relative value of those currencies will drop.
The former governor of the Bank of England Mervyn King (now Lord Lothbury) believes that the coming crisis caused by the coronavirus in the real economy will be worse than the financial crisis of 2008. He told the BBC last month that: “in the financial crisis, we were dealing with a relatively small number of financial institutions. We knew broadly what we had to do. In this case, the situation is extremely uncertain.”
For anyone not around at the time, take my word for it – it was pretty bad.
An unlikely safe haven
From a central bank point of view, the coronavirus crisis is different to almost any standard economic shock in that it necessitated both supply and demand intervention.
And while global markets reel, bitcoin, and other cryptocurrencies, have remained largely unaffected. Bitcoin’s most disruptive benefits have moved front and centre: scarcity and liquidity, in a world of money-printing and global financial strain.
Clearly, despite some sell-offs, for many, bitcoin currently represents a hedge in the face of huge stock market risk. And with institutional flows coming in, the foundation is well and truly being laid for it to be traded with trust and confidence. The super-speculation, which feels more like the dotcom era and subsequent crash, is waning. Institutions and other large financial organisations are now more engaged than ever, with the likes of Fidelity, Square, and Revolut all facilitating trading. And India has finally lifted its crypto trading ban.
CoinCorner, a bitcoin exchange in the UK, says it has seen a growing number of people entering the bitcoin market in 2020, perhaps also in the run-up to the anticipated bitcoin halving in May. If you don’t know about halving, there is a good explainer here. CoinCorner says it saw an increase in the number of new customers every month since the beginning of 2020 with February up 5% compared to January, and March was up 17.6% compared to February.
We could, of course, see new innovations in the crypto space come out of this crisis. But certainly the euphoric frenzy (based on not very much) that we saw in bitcoin’s earlier days has come to an end, and now, investors on both the institutional and retail side are interested. The start of something more legitimate for financial asset allocation has arrived. And an asset immune, even somewhat, to the volatility and uncertainty of the present time, could be a saving grace to millions.