COVID-19 & Crypto: Implications and Opportunities
Key learnings from the crypto martket response to the Coronavirus and its possible implications for the future.
In the last weeks, the global crypto community was shocked and not primarily because of the fast-spreading of the COVID-19 virus. Since the existence of cryptocurrencies in 2009, starting with the most famous cryptocurrency Bitcoin, crypto-assets always had the reputation (entitled or not) to act against the stock market and be a safe haven asset such as gold or the Swiss Franc. When the COVID-19 pandemic became a global problem, stock market prices dropped historically. Crypto holders were very happy because according to their thinking, crypto should, as a result, spike in prices and reach new all-time highs breaking the 20k USD mark of Bitcoin.
As we all know this was not the case.
On the contrary, the crypto markets reacted similarly to the stock markets to COVID-19 with massive drops in valuations. Bitcoin’s price fell in less than one day by 52%, nearly reaching the 4k USD mark. Many experts argue that the drop in crypto markets was due to the exiting of institutional traders that did the same with stocks and gold, therefore the similar course development. If this is true, it shows that crypto is becoming more and more an asset class that is part of institutional portfolios, which is a good thing but results also in similar price movements as we saw. Mabey the crypto markets are not as independent anymore from traditional financial markets with a high number of institutional investors present.
So can we say crypto failed? That the people who argued that crypto is only a very volatile high speculative asset for people who have no clue of investing and only want to get rich very fast?
The answer is definitely no as it is in general too early to judge crypto, which is still in its infancy. Contrary the following financial crisis could accelerate crypto’s mass adoption as traditional money will devaluate. To understand my thinking, we have to go back in history to the origins of crypto assets. Bitcoin was the first cryptocurrency, and it can be said with a very high likelihood that it was created as an answer to the financial crisis in 2008 that showed various inefficiencies in the financial services industry. Although the current crisis is not a result of our still very ineffective and intransparent financial services industry, but the result of a so-called “black swan,” the economic implications are very similar.
We all know that as a result of the COVID-19 pandemic, we enter the next financial crisis as many businesses are closed and people become unemployed. This time, not banks need to get bailed out but small- and mid-size businesses that (for the most part) cannot generate revenues during the lockdown period. Some experts even believe it will be the worst crisis in the history of humankind worse than the Great Depression.
As a result of this financial crisis as in the previous ones, more money will be printed to boost the economy, decreasing the value of the existing money at people’s costs. The U.S. Federal Reserve recently initiated unlimited quantitative easing to help the economy. Here is where crypto’s opportunity lies. Taking Bitcoin as an example, the number of coins is limited to 21 million. This was done on purpose so that in theory Bitcoin’s value could only increase as its supply was finite contrary to FIAT money. For people looking to prevent devaluation of their assets, crypto could be the perfect alternative despite the high volatility.
If Satoshi Nakamoto and other crypto proponents like Tim Draper are right, we could witness an extreme increase in the price of crypto assets. Maybe even breaking the all-time high of 20k USD in 2017 for Bitcoin, if mass adoption happens due to COVID-19; As people will be looking for assets that cannot be inflated like FIAT and are reachable even during a lockdown, which is not the case for a physical asset like gold. Herein crypto is very practical as in theory it is independent of politics and reachable with every device that has an internet connection, no need to carry gold bars.
Crypto’s origins were the result of a financial crisis, maybe its mass adoption too.
