The onset of the novel coronavirus, or COVID-19, has become the defining event of 2020, affecting all walks of life as national authorities scramble to control the worldwide pandemic. The effect on financial markets has been dramatic and damaging. But, for Bitcoin and other cryptocurrencies, there is something of a silver lining.
Coronavirus exposed the weakness of traditional financial instruments, however, crypto has proven surprisingly resilient. As a result, BTC and other cryptocurrencies have seen their investment values rise and enjoyed more attempts at their mainstream integration.
Traditional finance’s loss has been crypto’s gain
COVID-19 brought supply lines grinding to a halt and saw many industries frantically cutting costs, laying off workers, and consequently putting huge pressure on the issuers of fiat currency to print, borrow, and spend their money to save their healthcare and economic infrastructures. This means inflation and devaluation of fiat currencies — an asset class that investors are sure to flee from.
Even the almighty US dollar, the global reserve currency, has suffered under the Fed’s quantitative easing measures to the point that holding USD nets zero or even negative returns.
USD performance in 2020/TradingView
In tumultuous times like these, investors usually flee to safe haven assets: instruments that tend to be detached from the wider market, the classic example being gold.
And because digital currencies do not exhibit the same market behaviour as fiat currencies, investors have also flocked to crypto, even going as far as to call BTC ‘digital gold’, since it has little correlation to the mainstream market. That doesn’t tell the whole story, though certain features of Bitcoin and other cryptocurrencies — such as having a fixed supply and no central controlling authority — do make it an inflation-proof option during this time of shrinking global GDPs.
Bitcoin, the original cryptocurrency, has seen a big boost over the course of the pandemic year and currently sits at around $19,000 USD, just shy of its all-time high in the heady days of 2017. But it wasn’t a simple success story. Back in March, the top crypto by market cap even dropped below $6,000 USD. But in the long term, it seems like the bulls are ahead, as the original cryptocurrency is closing the year on a triumph.
BTC/USD in 2020
Several financial heavyweights shifted to crypto in 2020, and COVID-19 and the weak dollar was a direct motivator. For example, publicly-listed and billion-dollar company MicroStrategy invested $250 million of its cash reserves into Bitcoin in July, with CEO Michael Saylor saying,
“It would not be prudent to continue to hold a large portion of USD as our treasury strategy.”
JPMorgan reports that institutions are buying BTC at three times the amount they were in the previous quarter. Similarly, former Goldman Sachs Fund Manager Raoul Pal shifted 25% of his portfolio into Bitcoin after the pandemic occurred. A CIO at BlackRock went on CNBC saying that BTC “could take the place of gold to a large extent” and an analyst at Citi projected that Bitcoin could reach $318,000 by the end of 2021.
According to a survey carried out by asset manager Fidelity Investments, 80% of the 800 European and US institutional investors that participated had stated that digital assets look promising, with one-third of these investors already possessing a crypto holding. Fidelity Digital Assets’ Director of Research, Ria Bhutoria stated that more American investors now own digital assets, with 27% holding them as of this year compared to 2019, when only 22% of investors’ portfolio’s included a digital dimension.
Mainstream adoption by individuals and institutions
The world is already well on track to becoming increasingly digitised, and the finance world is no exception. In the year of lockdown, social distancing, and remote work, more of us are turning to digital solutions for payments, personal finances, and even investments too. According to research by the deVere Group, the COVID-19 pandemic has fueled a 72% surge in the use of fintech apps in Europe as a result of adaption to remote working conditions. Retail investors are also participating in the flight to digital over fiat currency, flocking to modern user-friendly crypto trading apps such as StormGain.
A digital financial system needs a robust back end to make transactions fast, secure, and cost-effective. Altcoins that focus on blockchain-based solutions (smart contracts, dApps) for existing financial systems (loans, mortgages, business transactions, etc.), are well poised to step in here. In this case, there are many competing altcoins, such as Stellar Lumens and YFI, that offer these solutions.
Many banks and financial institutions turning to blockchain solutions for cross-border transfers, especially with crypto platforms that are open to collaborate with financial regulators. On the other side, whether it’s the proposed US Cryptocurrency Act 2020, China’s Digital Yuan, or Russia’s cryptocurrency regulation bill countries great and small are moving into crypto territory this year, spurred on by the increased importance of cryptocurrency during the coronavirus pandemic.
While it remains to be seen what the impact of future regulations and state digital assets will be, the COVID-19 crisis has proved one thing — cryptocurrency isn’t going away, and is in fact on track to become a more central part of the global economy than ever before. This is no small thanks to BTC’s extraordinary resilience during the market turbulence, and also to blockchain’s increasing utility in financial innovation.