Part 2 of The Tech Panda´s ten-part crypto series this month. Do check out Part 1. Keep watching this space to learn more about this burgeoning fintech tool.
While cryptocurrencies are volatile by nature and have been so ever since Bitcoin was launched in 2009, world events often lead to a seesaw in the markets. COVID-19, a world event of epic proportions, has had its own impact too. And as is the case for other digital sectors, the impact has been good.
Just two days ago, Bitcoin has spiked to more than US$17,000 touching a three-year high.
Reports say that investors have been drawn to cryptocurrencies while the pandemic has raged on. Often, in times of volatility, investors are known to move out of their investments from the stock market to safer havens such as gold and cash. It´s being said now that cryptocurrencies are beginning to get counted in these safer havens.
The Tech Panda asked a few entrepreneurs and experts about the impact of the Corona virus on the crypto space.
It is designed to be a hedge against bad monetary and fiscal policy
“It has been crypto’s time. It has really taken off since COVID-19. 2020 has been an exceptional year for every crypto company,” he says.
“One of the beautiful things about the crypto world is there is almost no bad impact of COVID. Even the prices are surging and market cap has increased by a modest percentage,” says Hammad Khan, Founder of Psyche Coin, a crypto organization.
The crypto world is not driven by governments or any policymakers, and this is where it has shown a powerful stand in the recent economic lockdown
A Strong Hedge
One of the reasons that cryptocurrencies have prospered in a post-COVID scenario is that they appear to be a safe alternative. Bathija says cryptocurrencies, specifically Bitcoin which is about two thirds of the crypto market at any given time in terms of market cap, are designed to be a strong hedge.
“It is designed to be a hedge against bad monetary and fiscal policy. During COVID-19, because of the economy shutting down, every government entered stimulus mode, which meant the people being laid off needed to be looked after by any government. Again, governments had varying degrees of success with that. But what you can see is every government´s national debt taking a huge uptick post-COVID,” he says.
Post-pandemic economic situations remind us that cryptocurrencies came into existence after the 2008 recession, an event that exposed the many chinks in government finance machinery. The economic situation created by the pandemic, though without anyone´s fault, once again exposes those chinks. Hence, people are once more gravitating towards looking for an alternative financial option that is not in control of the government.
“The crypto world is not driven by governments or any policymakers, and this is where it has shown a powerful stand in the recent economic lockdown,” says Khan.
“I think more and more people are realizing that in order to maintain their purchasing power and a safe haven, even though very volatile, cryptocurrency does seem to be a better approach,” says Luke Stokes, MD of FIO Protocol.
I think more and more people are realizing that in order to maintain their purchasing power and a safe haven, even though very volatile, cryptocurrency does seem to be a better approach
Not Just Since 2008
Stokes says that the lockdown has exposed fundamental insecurities in the global financial space that have been there since the 2008 recession, or even all the way back to the Nixon Shock of 1971.
“With the COVID situation, there’s an argument to be made that this is essentially exposing some of the weaknesses in the way our economic system is structured, where it’s not as robust and resilient and partly the mechanisms and tools that we use to stimulate the economy such as printing more money or injecting more capital into the situation aren’t necessarily effective long-term potentially,” he says.
According to recent reports, the US Federal Reserve has injected more than US$9 trillion into the market since September 2019. Estimates are saying that 22% of the circulating US dollar was printed in 2020.
Calling this a staggering metric considering the trillions of dollars that already exist as debt, Stokes says that the world debt clock is spinning up faster and faster.
“I think anyone who’s paying attention will recognize that we may need another mechanism. Gold and silver might be interesting, but you can’t really build a digital economy on something that is so hard to transport,” he says.
The steady move towards a cashless society is another reason why crypto has caught on. Transactions without physical contact are being welcomed in a post-pandemic lifestyle, where in, not just crypto, but all forms of fintech are increasing in adaptation.
“While we’ve already been moving towards a cashless society, COVID-19 has been accelerating that transition, with people seeking to reduce contact as much as possible,” says Sarah Kim, an Ecosystem Development Associate with Terra.
While we’ve already been moving towards a cashless society, COVID-19 has been accelerating that transition, with people seeking to reduce contact as much as possible
Crypto was Already Getting There
While COVID has doubtlessly given the crypto space a boost, many are saying that pandemic or not, the crypto space was already headed for success.
“I think a lot of this was inevitable and marching forward. The kind of adoption rates, the number of wallet addresses that are created on a daily basis, the number of people transacting, the volume of currency being tracked and transacted in the blockchain space, I think that was kind of inevitably moving forward,” says Stokes.
Adoption of crypto has not only been seen on an individual level but also at organizational and government level. Countries like Ukraine, Russia, China, South Africa, Nigeria, Kenya, and the US are currently among the top-ranking countries by cryptocurrency adoption, according to the 2020 Global Crypto Adoption Index.
China has already rolled out its Digital Currency Electronic Payment (DCEP) earlier this year in selected cities. The currency will let users connect downloaded electronic wallets with their bank cards, create transactions, and transfer money.
“While it hasn’t necessarily been due to COVID-19, cryptocurrencies have been seeing growing adoption, not just on an individual level, but even at the government level. With cryptocurrencies offering unprecedented accessibility, control over savings, and opportunities exceeding those of traditional banks, I think we will continue to see the use of cryptocurrencies continue to grow,” says Kim.
New Crypto Trends
Although a recent technology, blockchain on which cryptocurrencies are based, have taken giant strides in fintech and other sectors. COVID induced lockdowns have pushed this tech even further, bringing about growth in areas like Decentralized Finance, or DeFi.
DeFi has witnessed exponential growth since late 2019, becoming one of the major trends in crypto. The sector recently reached a new milestone as the total value locked in DeFi touched an astounding high of US $4 billion.
DeFi is the application of smart contracts to financial instruments, which removes the need for a middleman or corporation. On the other hand, Centralized Finance or CeFi replicates the legacy financial industry by letting people garner interest or get loans, wherein their cryptocurrencies become a form of collateral.
Such trends are making it easy for the common people to get into this industry, while also bringing down the risk factor. Khan says the space must become easier to understand and use.
“New emerging trends like DeFi and CeFi are bringing economic trends into the market and this is where market cap is growing. It took 10 years for high-tech people to understand the benefits of cryptocurrency and blockchain, how long will it take for the common people to be part of it? It has to be easy to understand for common people like WhatsApp, email or PayPal to be in the mainstream,” he concludes.
A Triumph Over Traditional Finance?
The crypto space boasts of cashless and ungoverned procedures and a technology that´s getting better at a rapid pace. However, its volatile nature still prevents many from investing in this space. Moreover, its high-tech nature makes it difficult to understand.
Still, with government-controlled processes revealing weaknesses in times like the post-pandemic landscape, investors are gravitating towards crypto. While it remains to be seen whether this decentralized space triumphs over traditional finance or not, COVID-19 is sure helping out.