Guest Article by Patrick Tan, CEO & General Counsel, Novum Alpha
With cryptocurrencies one of the best performing assets of 2020, many investors are understandably wondering if the momentum can continue post-pandemic.
Increased institutional participation in cryptocurrencies, particularly for Bitcoin, mean that they are here to stay as an asset class, but prices will continue to be volatile
Continued quantitative easing and loose monetary policy, coupled with the specter of inflation, ensures that Bitcoin will continue to be attractive as a hedge
A lack of correlation between Bitcoin and other assets, in particular stocks, means that investors looking towards a portfolio diversifier cannot afford to ignore this nascent asset class
The Coronavirus Pandemic Will Not End as Quickly as We Expect
We’re not living in the time of the 1918 Flu Pandemic. The world is a lot more mobile and information travels even more freely, including misinformation.
With many getting their daily dose of news from social media, and trust in mainstream media outlets at its lowest levels in decades, assumptions that people, will be lining up to receive coronavirus vaccines are naïve at best.
According to a recent Pew Survey, 72% of Americans expressed a willingness to receive coronavirus vaccinations in May this year, a figure which has fallen to 51% in September.
And that was even before an effective coronavirus vaccine had been announced.
The latest controversy from AstraZeneca and Oxford University’s coronavirus vaccine candidate’s clinical trials has also cast a pall over vaccines in general, and comes at an inopportune time, just as pharma companies are ramping up vaccine production.
All of which contribute to the potential for the pandemic to last much longer than would be hoped.
And for every additional day that the pandemic persists, already heightened interest in cryptocurrencies, particularly for Bitcoin, will rise.
Increased Institutional Participation
When Bitcoin hit its all-time-high in 2017, the hoped-for institutional participation failed to materialize.
Instead, in a frenzy of buying activity, retail investors bid up the dollar-price of Bitcoin to dizzying heights, fueled in no small part by opportunistic and novel fund raising methods such as initial coin offerings or ICOs, many of which turned out to be scams.
The volatility and lack of accountability in those early days ensured that institutional investors would have always sat on the sidelines when it came to cryptocurrencies, and the precipitous crash in prices in 2018 confirmed that their instinct was correct.
But this time may genuinely be different.
Massive pandemic-driven stimulus packages from governments and central banks have fed the narrative that Bitcoin could serve as a reliable store of value in the face of national profligacy.
And even listed companies, including payment services provider Square and software firm MicroStrategy, have both placed a portion of their reserves in Bitcoin on that assumption that fiat currencies will be devalued.
Add to the mix a growing list of high-profile Wall Street money managers, including billionaire hedge fund investors Stanley Druckenmiller and Paul Tudor Jones, revealing their holdings in Bitcoin, and it’s not just retail investors driving Bitcoin’s rally of late.
Even online payment services giant PayPal, with over 364 million users globally, is throwing its hat in the ring and enabling cryptocurrency payments to merchants, as well as purchasing and selling cryptocurrencies on its online payment platform.
The likelihood is that this institutional participation will only increase post-pandemic.
To be sure, even Microsoft and Expedia accepted Bitcoin for payment, but quietly dropped that option when it became apparent that Bitcoin was too volatile, and interest had waned, but reinstated it again later.
And while it’s entirely possible that these high-profile names would drop cryptocurrencies from their roster once again, it’s less likely this time simply because of the broader institutional interest and ecosystem supporting cryptocurrencies.
Finally, it’s difficult to ignore that the central bank of the world’s second largest economy has gone ahead to issue its own digital currency – the digital yuan.
That move to issue a central bank-issued digital currency by the People’s Bank of China, has also inspired the European Central Bank to consider the same.
The coronavirus pandemic has also highlighted the deficiencies in countries where large swathes of the population are unbanked and the potential for notes and coinage to serve as disease vectors – all of which make a stronger case for digital currencies.
Even post-pandemic, these concerns are not likely to disappear or easily dismissed, and globally, 80% of central banks are studying or considering issuing their own digital currencies, according to the Bank of International Settlements.
The sheer presence of central bank digital currencies is a nod to Bitcoin and cryptocurrencies, meaning that it’s difficult to write off their existence, especially when national currencies have gone the same way.
Inflation & Correlation
Modern Monetary Theory has seeped into the psyche of developed world central bankers and governments.
While government spending to bolster economies savaged by the worst effects of the pandemic was necessary, it has also saddled rich countries with mountains of debt and no real way to get out of it.
Increasing taxes could act as a parachute on tentative economic recovery while battered healthcare systems will put pressure on governments to increase public spending.
That interest rates are so close to zero means that there will be a temptation to borrow more and to postpone balancing budgets.
Governments will justify increased spending to help a nascent economic recovery, yet the tide of protectionism and nationalism may not necessarily be reversed simply through the inauguration of Joseph Biden as the 46th U.S. President.
And that means inflation, although kept at bay for so many decades since the U.S. abandonment of the gold standard, may roar back to life, adding to the interest in Bitcoin as a potential hedge.
Cryptocurrencies in general, and Bitcoin in particular, have shown inconsistent correlations with stocks and gold, at times moving in unison with the two, and at times not at all.
That inconsistency of correlation between Bitcoin and cryptocurrencies, against other asset classes, make them an ideal, if somewhat volatile, portfolio diversification tool.
Both Goldman Sachs and Citigroup have predicted declines in the dollar in 2021, when many expect pandemic concerns to subside.
But even in a post pandemic landscape, pressure on the Biden administration to rebuild will mean greater government debt and spending, thus putting pressure on the greenback.
Considering that the dollar is the primary unit of currency with which Bitcoin and other cryptocurrencies are measured against, dollar weakness would suit the digital asset narrative and see prices rise in dollar terms.
The coronavirus pandemic has increased and accelerated interest in cryptocurrencies at a pace that would not otherwise have been possible under normal circumstances.
The cryptocurrency genie has already been released from the bottle and is not likely to go back in again.
Whereas 2017 saw interest in cryptocurrencies peak, driven primarily by retail interest, 2020 marks a turning point, driven by institutional commitment.
This opinion piece was commissioned by Finext Eastern Bank (“Bank”) and does not represent the views of the Bank or its owners.