We have seen investors and consumers alike deliberate about what the economy will look like post-pandemic. As the world emerges from the crisis, industries that have been shut down will be left surveying the widespread damage, some of it permanent. Consumers will likely be split between the fortunate ones that have been able to work and others whose livelihoods have been compromised as a result of the shutdown.
To mitigate the sever economic impact, governments and central banks globally are printing and distributing extra money to prop up parts of the economy which can no longer function at pre-Covid capacity levels. In the UK alone, an estimated £123bn has already been plugged into the economy and there are estimates that Bank of England stimulus levels could peak at £1 trillion.
Despite the argued necessity of these measures, it is almost impossible not to question the impact on inflation. This massive increase in governmental quantitative easing will have an impact on the global economy, and for asset prices in particular. While inflation is defined as the rate at which the average price level that particular goods and services increase over a period of time, it’s easier in this context to regard it as the result of a decrease in purchasing power.
The golden option
As a result, investors will often look safe-haven assets that could provide a hedge against rising prices and avoid the destructive impact of inflation. Gold price is one indicator, and at the time of writing it is seeing a ten-year high while London’s FTSE 100 tumbled 2.8 per cent, and the Eurex Exchange reported a 59 per cent month-on-month decline since April volume. Historically gold had been used as a hedge to protect against economic events including inflation or currency devaluation. Although we can expect this use to continue as a popular option, the pandemic has shown a shift in consumer interest to other safe haven asset classes.
Cryptocurrency is an alternative method of inflation protection which should not be overlooked. Although previously appearing as counterintuitive due to perceived volatility, digital assets have held their own against the stock market, unlike other commodities such as oil. The value of oil has crashed due to vanishing demand and a resulting supply excess – causing the price to fall to negative value.
While the comparison between gold and crypto has some nuances – the broader theme of Bitcoin as a protective hedge against inflation has broken through – especially after the BTC halving we saw in early May. This event has brought attention to Bitcoin’s controlled supply, with only 21 million max tokens being permitted. At a time when more paper currency is being created in circulation, the amount of Bitcoin halving is causing investors to look away from government-backed paper. While also highlighting the use of cryptocurrency generally as a means of exchange within a more digitally oriented world economy.
A newer alternative: The Crypto offering
In contrast, digital assets have seen a different story. Without the worry of political interference and variable supply rates, cryptocurrencies can benefit from being a less vulnerable investment in times of crisis. We have seen that Bitcoin is still up 22 per cent from a year ago. Newer coins like Tezos are up around 30 per cent so far this year. Both digital currencies highlight that crypto volatility is potentially a sign of the past, especially when compared to the volatility in “traditional” asset markets.
With crypto trading operating 24/7, 365 days a year with instantaneous settlement while traditional equities still have fixed trading hours and have a settlement cycle of T+3, crypto can provide even more perceived security and flexibility for investors. Cryptocurrencies can also be used as a tool for portfolio diversification and as a method of protection against the economic and political uncertainties to come.
Looking at the examples
We have witnessed economic disruption before, across ongoing periods of hyperinflation in Venezuela and Zimbabwe more recently, and in Weimar Germany in the 1920s. While it is not helpful to draw comparisons across these countries’ or their respective banking systems, it is worth taking note of the value crypto offers in terms of being an alternative to unstable national currencies.
Well-known investors such as Paul Tudor Jones are buying bitcoin, saying that his fund may hold as much as a low single-digit percentage of assets in bitcoin futures – a measure to protect against a rise in inflation. While Mike Novogratz stated that 2020 “will and needs to be Bitcoin’s year,” underlining further investor confidence in digital currencies. Data reinforces this view, by looking at results from the crypto asset manager Grayscale. In Q1, inflows north of $500 million, more than doubling its previous best quarter. Almost a third of this capital came from new investors and most being institutions. Almost every indication that inflationary fears shall add to the tailwinds already powering fresh investment in cryptocurrency, among them institutional involvement and improving regulation.
Bitcoin is inherently structured to encourage a deflationary approach and a relatively stable store of value – acting as a true alternative to hedge against inflation, as well as the policies that precede it.
Some concluding remarks
While digital assets emerged out of the embers of the 2008 financial crisis, we can only speculate what technological innovations will rise post-pandemic. Hopefully, the global economy will allow cryptocurrencies to solidify their place in future investment portfolios as it currently demonstrates strong performance and price sustainability.
We are beginning to see the early signs are already there, that investors are turning to cryptocurrencies both as a key tool for diversification and a hedge against uncertainties to come. Ultimately, we are just at the tip of the iceberg when it comes to truly understanding the vast opportunities that digital assets and blockchain for transforming the global economy and we are ready for this challenge.
Stephen Stonberg, COO and CFO, Bittrex Global