With Bitcoin reaching all-time highs, it seems timely to write about the world’s best-known cryptocurrency and the influence the pandemic has had on the asset.
COVID-19 turned the status quo on its head with many businesses and industries sadly folding. The world’s largest financial institutions have seen their valuations plummet; yet, the world of digital finance has encountered a landmark year, especially for major companies offering cashless payment methods. This has largely been fueled by the rise in mobile computing power, connection speed and individual’s opting away from cash due to the risk of contamination, which has helped further bring instant digital payments to our fingertips.
The unprecedented surge in the demand for digital payments has also played a role in the rise of Bitcoin (BTC) this year, which has experienced a ~400% gain since March. With more customers beginning to use digital wallets more frequently and merchants increasingly accepting payments via smartphones and QR codes (short for Quick Response — fun fact), this lends quite well to cryptocurrencies.
Fintech giants PayPal and Square are also moving into the cryptocurrency space by allowing users to buy, hold, and sell cryptocurrency in their digital wallets. In Q3 of 2020, Square’s Cash App generated more than $1.63 billion in BTC revenue. Looking beyond retail investors’ enthusiasm, institutions are now embracing cryptocurrency. MicroStrategy led the way in August, purchasing $425m, and Square followed with a $50m investment. US cryptocurrency manager Grayscale Investments surpassed $10b in cryptocurrency assets for Institutional investors. This week, Guggenheim Partners announced it could invest up to $530m in BTC. Finally, BlackRock’s chief executive, Rick Rieder, declared “cryptocurrency is here to stay”.
The pre-pandemic demand for BTC was largely speculative and excitement based on little mainstream adoption. However, it now seems there is more substance to the price increases this time and there are a variety of macro factors, amongst other things, that could help explain why.
It is first worth noting the impact COVID-19 has had on technological transformation, and how the pandemic has catapulted civilization into a more digital world; what might have taken 10 years to achieve can now be achieved in 10 months. With individuals being forced to transact online, this has increased our exposure to financial surveillance and fraud, accelerating interest in digital currency.
From a macro level, the economic effects of COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, a devalued dollar, and global political uncertainty also play a large role in Bitcoin’s climb. Globally, hundreds of trillions are invested in stocks, bonds, real estate, and cash, but investors are now looking to broader strategies with better prospects. BTC has proven a safe haven because the decentralized network means it is not controlled by any government or company.
BTC is gradually being adopted, not so much as a means of payment but as a store of value. Many of the big-name investors who have remained bullish on BTC, including the likes of Jamie Dimon, Paul Tudor Jones, and Ben Miller, have been forced to reassess Bitcoin this year. Ray Dalio recently admitted he “might be missing something” about the currency. Cryptocurrency still remains a gamble, but everyday people are seeing more and more value in the crypto-asset, and COVID-19 has certainly accelerated this awareness.
Hamish Baillieu, Senior Investment Analyst
Central banks — including the US Federal Reserve, European Central Bank, Bank of Japan, Swiss National Bank and the Bank of England — are pushing ahead to develop their own digital currencies (known as “central bank digital currencies” or CBDCs). Leading the pack is the People’s Bank of China, which is piloting a digital renminbi.
Some large institutional investors, particularly progressive-minded endowments, have begun to add small bitcoin allocations as part of their overall portfolios. To accommodate this demand, some firms such as Grayscale have created long-only bitcoins funds that simply hold the coins in custody accounts, but the the fund structure allows institutions to participate in a method they are used to and comfortable with.
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