Like our old saying, “When there is recession, there is an opportunity”. In 2008, we faced the world’s worst financial crisis. Lehman brothers’ collapse has shown the world the inherent vulnerabilities of our monetary system. Central banks across the globe were caught off guard. European Central Bank (ECB) hastily made deep cut in the interest rate in the hope to restore investor’s faith. However, market did not recover at the rate as expected since then. Ironically, another historical event happened in the same year – bitcoin.org domain was registered.
Fast forward to today. ECB’s idea of negative interest rate fails miserably, and US Fed follows Japan’s zero interest rate policy will lead to monetary failure in the long term. Investors, flooded with these “free” money, are facing a challenge of finding returns in their investment. As such, they are more willing to take up more risks in exchange for higher returns. Cryptocurrencies, once known to be highly speculatively, starts to re-ignite the interests of investor amid Covid-19 crisis.
Quick Recap of Bitcoin’s History
Hailed as the “King of Cryptocurrency”, Bitcoin first appeared in investors’ radar in 2013. During that time, almost all markets were trying to recover from the Global Financial Crisis. Investors were extremely cautious not to put money in conventional financial instruments; stocks, bonds and even commodities were not spared as well as they were all interlinked with financial instruments one way or another. Bitcoin, on the other hand, is the only “tradeable asset” that was unlinked to other financial products while at the same, it offers certain degree of liquidity to investors.
That year, Bitcoin was priced at around USD 13. In less than a year, the price had skyrocketed to slightly less than USD1,300 (That’s approx. 100x returns in a year!) That price spike was not sustainable which inevitably, Bitcoin crashed; pricing it at about USD 600 in the same year.
It was a choppy ride for Bitcoin between 2013 to 2017 but it was also a “Golden Era” for Bitcoin. Thousands of new cryptocurrency exchanges were formed. Regulators from all around the world refused to acknowledge Bitcoin as an asset class. However, market will not succumb to regulations; it will just find their ways for survival. Start-ups which struggled to raise fund via conventional means starts to offer their own coins in what they called “Initial Coin Offerings”. At the end of 2017, Bitcoin was priced as high as USD 19,783!
Many crypto investors became millionaires during the Golden Era of Bitcoin. However, the peak was short-lived. By the end of 2018, many cryptocurrency exchanges collapsed, and Bitcoin had crashed to USD 3,300.
Resurgence of Cryptocurrencies during Covid-19 crisis
Over the years, we have heard many criticisms debating the intrinsic value of Bitcoin. I believe most of them are valid but not all of them. At the very least, Bitcoin laid an important pillar for further technology advancement in the area of finance and business – Blockchain technology. A classic example is Ripple (XRP) which made used of this technology to create an architecture that could facilitate faster payment settlement for financial institutions. In Japan, banks are using Ripple protocol to facilitate payment via mobile app.
Blockchain has created an entirely new market of its own – cryptocurrency and that has completely changed the way how investors look at the economy and after more than 10 years, investors began to accept the fact that Bitcoin is here to stay. For the past 5 years, Bitcoin’s transactions has grown more than double to about 300,000 daily (source: ycharts.com last checked on 26 Apr 2020, link here)
However, we do not see sharp price spike of Bitcoin as what it had experienced before in the last decades. One logical explanation is the fact that investors have more options these days. Over time, the entire cryptocurrency ecosystem has expanded and become more diverse. There are many more cryptocurrencies now. Each is developed to solve a specific problem faced by business. Bitcoin, though it is the largest by market cap, is not longer the only cryptocurrency that investors have eyes on. For instance, Binance, one of the earliest cryptocurrency exchanges, offers its own Binance coin (BNB) that is used as a base currency to buy/sell other cryptocurrencies.
The development of cryptocurrency exchange played an integral part of the ecosystem. In recent years, the cryptocurrency market has grown tremendously. In 2017, market capitalization was approx. USD 23 Billion which Bitcoin contributed approx. 86% of the market share. As of Apr 2020, the total market capitalization is approx. USD 218 Billion but Bitcoin’s contribution falls to approx. 63%. (Source: https://coincodex.com/)
Hunger for “Safe Haven” and Returns
Low interest rate environment is pushing investors to the edge. “Risk-free” returns from government bonds are not longer attractive and that have domino’s effects to money market. On the other hand, term deposits in bank is eroding the value of money.
Investors are forced to take on higher risk. Ironically, investors deemed the more speculative Bitcoin as a “safe haven” because it is the only “asset” that is unlinked from other markets such as stocks and bonds which are expected to hit badly in the worsening Covid-19 situations.
Such behaviour exhibited by investors prompted cryptocurrency e-wallet players to provide more “banking” services. The idea of staking requires cryptocurrency holder to deposit their cryptocurrency to their e-wallet accounts. In exchange, holder will receive an interest, generally higher than what conventional banks are offering, which are paid in cryptocurrency into the e-wallet. For instance, Crypto.com is giving up to 18% interest (per annum) if you are staking their CRO coins.
To attract more investors jumping into the cryptocurrency world, cryptocurrency players are releasing “Stablecoins” which are pegged to the fiat currency. The idea is well received by the investors. At the point of writing, the total market capitalization of the Stablecoin has already surpassed USD 7 Billion. (source: https://cryptonews.com/news/billions-in-crypto-dry-powder-on-exchanges-ahead-of-bitcoin-6326.htm)
With no where to put their dollar, investors are using these “crypto-banking services” to battle this low interest rate environment. All investment carry risk and it is all about managing it. The Stablecoin, in one way or another, eliminates volatility and that has been perceived by investors as a “safe haven”.
Central Banks – The Only Reason Why Cryptocurrency Survives
Central bankers are lacking the understanding of the hyper-globalized markets. Lowering interest rate to prevent the economy from falling apart is like giving a cold medicine to a flu patient. It manages some symptoms, but it does not prepare the markets for recovery.
The modern economies are more complex but central bankers are not equipped with the skills and tools to tackle the economic problems. Flooding the market with “free” money is detrimental to entire financial system and investors are losing their faith. Banks are not able to earn enough profit (interests) from their loan business. Consumers are pushed to put money in all type of financial products fearing that their savings might be eroded in future value terms if they just put it with the bank as deposit.
In short, money is devaluing persistently forcing investors to put their dollars on high-risk technology sector to seek for better returns. In fact, it is already happening before cryptocurrency even exists. Tech stocks, which have all-along been speculative in nature, advanced in the last recession. From an investor’s perspective, it was counter-intuitive decision, but the bet was rewarding. In the short 10 years, technology has advanced, and it is the only resource that we could rely on to keep our economy engine moving despite the lockdowns in major cities.
That is the way the global economy is heading – Technology. Like it or not, our financial system will be getting more complex in future (in fact, it is complex enough now) that human central bankers may not be able to tackle multiple economic problems at the same time. To put it objectively, we will not know how financial technology will play out in the future but now, those with money are betting on cryptocurrency.
This article has been reposted @medium https://link.medium.com/QpcvKrMc15