Bitcoin during the Covid-19 crisis
If Bitcoin is seen as a haven of peace in times of crisis, it is becauseit is a deflationary asset, the operation of which was created to avoid inflation. As a reminder, inflation is the excessively high increase in a means of payment, which leads to a lasting rise in prices and a depreciation of the currency. The faster the currency loses value, the more problematic inflation is considered.
For example, the United States dollar (USD) is prone to inflation (it has lost 96% of its value since 1913), and the current environment is not going to help matters. The “Fed” spin the printing press to artificially support the economy in the face of the Covid-19 crisis … But the consequences will be, if we believe most economists, harmful in the long term. The equation is as follows: as the creation of money does not correspond to the creation of real wealth, this will result in inflation. Exactly what order, we do not yet know.
The advantages of Bitcoin in the face of the crisis and inflation
Then comes Bitcoin. As mentioned above, BTC is a deflationary currency. One of the reasons is thatthere are a limited number : 21 million pieces in total. This means that whatever happens, we will not be able to “print” more bitcoins. Halving, which cuts the supply of Bitcoin by half every 4 years or so, also helps control possible inflation.
Another advantage of Bitcoin is its great decentralization. Its supply and transactions are not controlled by a central body. The payment network relies on the work of miners, who use their computing power and are rewarded in return. This means that Bitcoin cannot be subject to censorshipor unilateral measures taken by governments. This is why it is increasingly seen as a bulwark, in order to protect the value of its savings.
👉 To go further, read our dossier: If Bitcoin were a currency, would we risk inflation or even deflation?
Signs of change among institutions …
If you’ve been following Bitcoin for some time, the arguments just made may sound familiar to you. They have been bullied by all pro-bitcoins since its inception. But the real test of Bitcoin’s ability to be a safe haven is underway. It is only when it is massively adopted in the sense thatit will prove its usefulnesstagainst inflation.
Already there are signs that change is underway. Initially suspicious of an asset that has built its reputation on its volatility, institutional investors are starting to turn to what is nicknamed “digital gold”. The success of Grayscale, which arrogated all the bitcoins produced over a period on behalf of its institutional clients, is a first proof.
Recently, we also learned that MicroStrategy, a major American company, had decided to adopt Bitcoin as its main reserve asset, in order to guard against inflation. As Cameron Winklevoss pointed out, the news is particularly notable: it shows that large companies now see BTC as a credible reserve, if not more effective than the dollar:
” It is enormous. Bitcoin is becoming mainstream. Businesses are beginning to understand the importance of holding a fixed asset in their cash flow. There will never be more than 21 million bitcoins. There is no such thing as a bitcoin printers. Final point. “
Guard against “the great monetary inflation”
For his part, legendary investor Paul Tudor Jones also poured water into his wine and began to appreciate Bitcoin’s status as a store of value. Last May, he announced that he had started using Bitcoin futures… And warned of future inflation:
“We are witnessing the ‘great monetary inflation’ – an expatunprecedented nsion of all forms of money, such as the developed world has never seen in the past. Substantial debts, which respond to printing money, are difficult to banish. “
Another sign of this paradigm shift: 25% of institutional investors hold Bitcoin, according to a Fidelity survey published last June.
👉 Discover our guide: How to buy bitcoins?
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… And among other investors?
Among institutions, the new interest in Bitcoin is therefore palpable, in a context of health and economic crisis. The interest of “small” investors is more difficult to measure, but it seems that it is very present, if we believe several signs. This is seen in particular in countries who suffer from currency crises serious. In Lebanon, where fiat currency has lost 50% of its value in ten days, signs point to a gradual adoption of Bitcoin. Several million dollars are thus exchanged each month between individuals.
Another telling example is Venezuela: the country’s economy was already experiencing hyperinflation, and the Covid-19 crisis has only worsened an already catastrophic situation. This is why we have seen the population turn to crypto-currencies, including Bitcoin. Currently, Venezuela is third in terms of crypto adoption, according to a study by Chainalysis. For Bitcoin in particular, we have also seen an explosion of P2P transfers in sub-Saharan Africa in recent months.
The conclusion to be drawn seems obvious: in countries facing a crisis and too high inflation, Bitcoin and crypto-currencies find their audience. We can therefore estimate that if future inflation turns out to be particularly strong in America and Europe, the population will also turn to Bitcoin and its consorts. The big crypto companies were not mistaken, as they now offer targeted services, like Blockchain.com, which launched its Bitcoin savings plan.
The limitations of Bitcoin in times of crisis
However, we must mention the flaws of this digital asset. Yes, Bitcoin’s performance is promising, and it turns out that the asset is now taken with great seriousness when it comes to hedging against inflation. But he also showed limitations. The most important took place last March. When the Covid-19 crisis has acceleratede, traditional financial markets have plunged … But also Bitcoin:
Bitcoin’s dizzying drop in March 2020. Source: Trading View BTC / USDT
The asset failed to play its role of safe haven and unscrewed under $ 4,000, while it exceeded $ 9,000 a few days earlier. This has raised doubts about the capabilities of BTC to exist on the fringes of traditional finance in times of crisis. That said, BTC still has to be recognized as having rebounded nicely since then, surpassing $ 12,000 over the summer.
Another argument of anti-Bitcoins is its great volatility. Investors may be reluctant to trust an asset that can gain and lose several hundred dollars in the same day. So far, the trend has been on the rise, but will it last?
Finally, another limitation of Bitcoin as a safe haven is the way it is produced. At present, between 60 and 70% of the hashrate bitcoin comes from china. If the Chinese government does not control the miners, however, this raises questions about the geographic centralization of a currency which is precisely supposed to be the most decentralized.
👉 To read on this subject: Co-founder of Ripple: China can take control of Bitcoin
Bitcoin, despite its limitations, seems to be well on its way to making a place for itself in the portfolios of the biggest investors. At the individual level, the asset appears to be mostly used in countries who are already experiencing hyperinflation and who are in dire need of finding alternative stores of value. It is therefore a safe bet that this use will also become more democratic in France and in Europe, if inflation turns out to be particularly high in the years to come.
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About the Author : Marine Debelloir
Intrigued by Bitcoin for several years, I developed a passion for crypto-currencies and the innovative technologies that result from them. I like to unearth the most delicious information to share it with you and help democratize this fascinating universe. But I don’t stop there! I also like to analyze projects related to cryptos and blockchains, which fascinate me just as much.
All articles by Marine Debelloir.