Central Banks and governments around the world are making efforts to restore market confidence and unleash unprecedented economic intervention and stimulus packages to cushion the impact of the coronavirus pandemic, aiming at preventing the health crisis from converting into a financial crisis.
Could it be the right time for Bitcoin to step in and get worldwide recognition?
Olaf Scholz, German Federal Minister of Finance, assured fresh stimulus is enough for the next months, and banks would have no risk lending freely to companies. In his opinion, Eurozone countries have developed robust instruments after the last crisis 2008-2009 to be prepared to deal with a new crisis, underpin confidence in a difficult situation, and to make the economy stabilize.
However, some experts from the Wolrd Health Organization (WHO) fear the second coronavirus wave and the possible resurgence of infections. There is still little clarity on the efficiency of the tools and lack of a reliable study that would be convincing on the shape of the pandemic. Pushing the global debt further in response to a significant downturn would mean there is little room left for the global financial system to act and prevent a full-blown economic crisis.
- ECB announced Pandemic Emergency Purchase Programme (PEPP) of €750 billion of private and public sector securities until the end of 2020.
- Germany launched a €750 billion package to combat coronavirus (borrowings, direct equity stakes, loan guarantees, grants).
- The UK pledged to cover up to 80% of the salary of the employees kept on the company’s payroll and provide £350 billion of loans and grants to help businesses during the Coronavirus outbreak and “do whatever it takes.”
- French President Emmanuel Macron said no French company, whatever its size, would be at risk of collapse.
- US Senate passed nearly $2 trillion government rescue package aimed at helping hard-hit industries, hospitals, issuing direct checks to families, providing loans to businesses, and expanding unemployment benefits.
What will be the economic impact of unlimited money inflow, broken supply chains, and month-long production stop? Do we have the appropriate policies after the crisis? Central banks cannot remain in the accommodative position eternally. It could cause an overall price level increase and boost inflation, thus decreasing the value and weakening the purchasing power of most currencies. The question is whether Bitcoin could seize this moment and rally — getting wider recognition, and possibly raising its chances of becoming a legal tender — or hope will fade away with time.
Bitcoin’s purpose is to serve as a payment system with publicly recorded and immutable ledger coded into a blockchain that functions without the intermediation of traditional financial institutions.
Bitcoin and other cryptocurrencies cannot be currently considered as legal tender because a central authority does not regulate the issuance and use of these instruments, and they are not linked to any national currency. Due to its nature, crypto transactions are carried out in what seems to be no jurisdiction at all. Cryptocurrencies are borderless and can be used, transferred, and issued from anywhere in the world, but they are not recognized globally as a means of payment. However, there are many acceptable payment methods which aren’t legal tender.
Bitcoin is not backed by any government, reserves, or valuable commodity. Its value derives from the social community’s perceptions, sentiment, and expectations which can be classified as follows:
Perception and Philosophy
A social community, which lost its confidence in banks’ ability to manage liquidity risk, endow the Bitcoin ecosystem with value as an alternative payment means because it’s free from central management and geopolitical risk.
Commenting on investors’ market trading behavior, Professor Richard H. Thaler (Recipient of the Nobel Prize in Economics) notes that beating the market is hard. There are two mistakes investors commonly make: overreaction where markets react to news or events more than necessary or when they don’t pay enough attention to information. When assets are crashing investors flee equities and bonds to cash. Value investing is the ability to choose the assets which are undervalued by the market at the moment and hold it until the market’s mind is changed. Otherwise, if there are no changes in perception, the asset stays undervalued. From this perspective, Bitcoin is undervalued, and stock volatility may help Bitcoin. It could be worth considering revising your existing investment portfolio, digesting all the information, and pay more attention to the crypto asset.
Bitcoin recognition and general acceptance as alternative money contribute to its value. While the number of businesses that accept crypto payments has been growing (Japan, South Korea), these transactions still represent a tiny segment of the economy. Bitcoin value is dependent on marketing and wider adoption. There is a huge potential for cryptocurrencies, but people need to be involved in a more in-depth way, broadly recognizing Bitcoin as a means of payment and not just a speculative investment. Economists argue that behavioral changes due to the pandemic may lead to a new way of economic thinking when the global economy gets back to normal. Who will take the lead?
Sentiment and Expectations
Market sentiment factors are: trends, news, herd behavior, and economic outlook. Bitcoin value is not based on fundamentals, but determined by market activity, which contains a speculative element. Bitcoin’s popularity as an alternative investment attracts new entrants boosting its value; however, for the wider public, there is a significant issue of price stability. Although countries hold diverse and often opposing opinions regarding the crypto assets, central banks on fears of exclusion from the disruptive crypto-based finance industry, ponder how to address the financial need of cheap, reliable and fast cross-border payments offering an alternative for existing cryptocurrencies. Adapting to these difficult times, governments could focus on introducing the new disruptive instruments “digital bonds” or launching new digital currency (“beatcovid” coin) in response to the crisis.
Limited Supply and Cost
There are only 21 million bitcoins that can be mined in total. A limited supply of a scarce resource, coupled with a high demand for that resource, affects the value. Could the pandemic crisis undermine the value of conditional currencies propelling the Bitcoin to the forefront?
It’s difficult to define the Bitcoin value giving the uncertainty surrounding its future development and adoption. A key question for the longer term is whether the integration or isolation of cryptocurrencies from the traditional financial system is the best way to exploit the opportunities and manage the risks.
About the Author: Kristina Mahareva, MSc Economics and Finance, certified blockchain technology and cryptocurrency expert, PhD candidate.