Crypto & Corona
May 11th, 2020
The coronavirus crisis is catalysing socio-economic and technological trends that will accelerate crypto adoption.
There’s no doubt that the coronavirus crisis has impacted cryptocurrency markets dramatically. I won’t forget being woken-up in the early hours of March 12th by a phone call informing me that the bitcoin market had just “broken”, following an unprecedented price crash. Like the wider financial markets, crypto suffered incredible, sudden declines and aggressive price swings in the wake of coronavirus.
These price declines brought to light some tough questions. Isn’t crypto meant to be uncorrelated to the wider financial market? I was told bitcoin was the new digital gold — a safe haven, a hedge against macroeconomic volatility, and the inflation of fiat currencies by central bankers. Had the fundamental bitcoin thesis of resiliency been disproven?!
Yes and no…
For those who see bitcoin purely as a trading instrument or tool to profit from global market turmoil, then the events of March were a brutal wake-up call. Bitcoin went down hard and fast just like the global stock market. But for those who see bitcoin and crypto as more than just a trading asset, the daily price swings were largely irrelevant. These prices are driven by short-term sentiment, market structure, and technical factors that are inconsequential from a long-term perspective. What really matters for crypto adoption are the slower moving big-picture shifts, which are occurring.
Those watching closely will see a number of trends emerging from this coronavirus crisis that runs parallel with the underlying crypto thesis and the values that bitcoin represents. Have no doubt, significant socio-economic change is coming and the prevailing winds are blowing in the same direction as crypto. Let’s examine some of these trends.
Governments are realizing their current financial infrastructure needs to be upgraded. This realization has been accelerated by the coronavirus-driven economic upheaval which is requiring mass-scale income distributions. Universal Basic Income (UBI) and Central Bank Digital Currency (CBDC) have moved from the political fringes to the center of policy debate. In the US an unprecedented $2tn stimulus package has been deployed, which includes direct payments to millions of individuals. The stimulus package initially included the creation of a new “Digital US Dollar” to facilitate these mass-scale payments, however, the authorities quickly realized that their existing financial infrastructure was not up to the task, so the bill was redrafted and they resorted to sending millions of cheques in the post. Meanwhile, China in contrast to the US’ technological inertia is marching steadily towards the goal of sovereign digital currency — fully aware of the power that it can wield. Just last month China’s central bank confirmed it was testing a mobile app for using the digital yuan. It’s technologically inevitable that money will be digitized and the timelines are compressing. The only question is who will win the race and how will digital currency manifest? Are we moving towards a crypto utopia or a state-controlled dystopia?
As we adapt to working in remote environments and self-isolation, the nature of our physical and virtual lives is changing. Anecdotally, many people have reported that they are actually feeling more grounded in their physical local communities but equally more connected to their physically remote, yet digitally-close, loved ones, and work colleges. Physically distant but emotionally close. In the new reality, everyone is remote and apart but equally, everyone is in the same place: online. There has never been a better time to build digital-first products and services. As this trend continues it’s natural that money that is built for the internet, and ‘lives’ natively online — will increasingly be used. This is because digital money is simply better than the alternatives and can do things existing infrastructure cannot. Digital money, powered by crypto, will be used because it is useful; it will ultimately enable any amount of money to be programmatically sent to anyone, at any time, for free. Why send cheques in the post when you can instantly stream payments online?
As well as being in one place — online — the world’s population is also facing one common problem: coronavirus. For the first time, everyone in the world is united in one universal battle, and the battle is decentralized. There is no single front-line or central focal point. Winning this battle requires technology that empowers the individual with the information and tools to make the right choices without exposing any more personal data than is absolutely necessary. Such infrastructure needs to be architected in a decentralized manner to ensure it is privacy-preserving and resistant to individual-level state surveillance. The creation of centralized pots of data should be avoided, as the risk of a data breach and abuse would be too high. Ideally, we would have the information at our fingertips to view our own health status, trace our contacts and assess our risk to others and our risk from others — all without compromising anyone’s personal private information. To be clear, I’m no healthcare expert, I don’t pretend to know all the answers and crypto is certainly no panacea to these challenges. However, crypto is a natural complement and facilitator of decentralized networks and has the potential to help build safe, secure, and efficient messaging at scale.
The more digitally connected we become and the more aspects of lives shift online, the greater the risk becomes that our intimate and detailed personal information becomes compromised. How can we adapt and thrive in this new world of digital connectivity without having to sacrifice our data and privacy? Much of the answer lies in encryption. In fact, it’s because of encryption and related technologies that any form of secure networked computing is possible at all. Likewise, bitcoin relies on applied cryptography and has security built into its very core. Our digital future will increasingly need to be an encrypted one.
Demand of Hard Assets
The coordinated monetary stimulus announced by the world’s major governments is unprecedented and of a monumental scale. The impact on long term-term economic growth, inflation, and asset prices is far from clear. Many analysts believe we are on the verge of a global depression, whilst others believe economic growth will quickly bounce back. Some economists are predicting that the monetary injection from central banks will send western economies into a spiral of hyperinflation, yet other equally qualified economists believe asset deflation is the real threat. In times of such macroeconomic uncertainty, people often flee to ‘hard assets’ to preserve their wealth: property or physical commodities like gold with a finite supply. A key feature of bitcoin is that it has a determinist supply built into its underlying protocol, meaning there is a hard cap on the total number of bitcoins that will ever be produced. Once you own a certain percentage of the total supply of bitcoins, you will always own that percentage. This is in contrast to fiat currency that can be created and inflated at the will of a button. It’s indisputable that hard assets have traditionally performed well around the time of inflation and recessions. Given that, I would certainly not like to bet against bitcoin right now, which is arguably the hardest asset of them all
When evaluating the role of crypto in this current era, I encourage you to look beyond the click-bait headlines and the daily price movements. Instead, look to the fundamental trends taking place: the economic, technological, and cultural forces that are driving us towards a future in which I believe crypto plays a pivotal part. The zeitgeist of the corona era is one characterized by values and forces that have considerable overlap with crypto: the accelerated shift towards digitalization, online connectivity, decentralization, encryption, and the demand for hard assets all point towards a crypto tide. Finally, it’s worth remembering that bitcoin was born from the 2008 financial crisis. Will the economic aftermath of the global pandemic usher in its maturity?
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The original post Crypto & Corona.