Rick Martignetti is an Associate in our debt advisory team and a cryptocurrency expert. In this article Rick takes a look at how the pandemic has accelerated the adoption of cryptocurrency.
The pandemic has accelerated many pre-existing trends, including the adoption of digital currencies by businesses, investors and institutions, but why?
After the 2008 financial crisis, money printing by central banks (quantitative easing) went from being an unthinkable emergency intervention to a bog-standard policy tool. So, when Covid went global in Spring 2020, the authorities simply turned on the taps again, flooding markets with money.
As much as a quarter of all US dollars in existence today were printed in 2020. This has exacerbated rocketing share prices, real estate and commodity values, known by economists as a ‘crack-up boom’ – where assets soar due to the devaluation of ‘fiat’ currencies.
Let’s consider the following facts:
This is a situation being replicated in many countries.
Bitcoin is a system of digital money. It is apolitical – i.e. not issued by any central bank. There is a known maximum supply which cannot be manipulated, and its price is set by the demand for it.
When you spend a £100 your bank and the receiving bank coordinate. Your bank confirms you have the pounds and marks your account down, while the receiving bank marks their account up. The Blockchain does this quite differently, it is underpinned by a database which records who owns each digital asset and the transaction history, this is the ‘blockchain’.
Michael Saylor, Chief Executive of the US- listed Microstrategy was at the forefront of corporate adoption. He looked at the Federal Reserve’s response to the pandemic. He then looked at $500m in cash on his balance sheet and thought “I have a major problem”.
Although consumer price inflation is low, consumer goods hide the true inflation rate and asset price inflation is through the roof, Saylor wanted a ‘hard asset’ on his balance sheet. He considered a basket of assets: silver, gold, own company’s shares or commercial property, but it was difficult to find $500m of quality assets.
After putting in place the necessary regulatory permissions, the company bought $425 million of Bitcoin. He then raised $650m through a loan note and invested that in Bitcoin. In total he spent $1.125 billion at $16,000 a coin, now trading around $60,000.
"Demand is soaring for digital currencies as an investment asset class."
Others are following. PayPal now allows its clients to transact in Bitcoin. Tesla invested $1.5 billion and will now take Bitcoin as payment for its products. Bank investor demand is soaring for digital currencies as an investment asset class.
One further aspect is ‘financial inclusion’. The World Bank states that the number of poor people worldwide remains unacceptably high. It is increasingly clear that the benefits of economic growth have been shared unevenly across countries. Poverty is driven by economic factors; this includes limited access to financial services and high inflation rates.
"1.7 billion people were unbanked in 2017."
World Bank, 2018
Decentralised digital currencies have the potential to level the playing field. We may well see countries with historically weak fiat currencies begin to hold digital assets in reserve against inflation and in preference to their own fiat currencies.
Giving everyone on the planet access to a bank account that can store value equally could improve living standards, level the playing field and counteract political manipulation in our currencies.
Could digital currency adoption be every bit as important as the Internet?
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