COVID-19 Impacts on Digital Currency (Two Reasons)
By Jared Sink
You may have heard that Bitcoin has recently hit a record high. I think that the COVID-19 pandemic certainly had an impact on the adoption trajectory of digital currency. I believe this for two reasons: germs and governments.
As I break this down, I hope you’ll have more clarity about how Bitcoin works.
Germs
While many folks have already gotten away from using physical cash, COVID has made those who did use physical cash consider digital forms of payment as a way to avoid potential germs.
As a cryptocurrency operating on blockchain technology, Bitcoin serves as a great alternative to traditional assets such as physical cash.
Services like PayPal, Venmo, Cash app, and digital currencies (like Bitcoin and Ethereum), since they allow you to exchange money digitally and avoid visiting financial institutions.
In fact, CPA Practice Advisor says there has been a 40% jump in digital payments since 2019. So it makes sense that more people are including Bitcoin in their turn towards digital alternatives as a germ-free way to exchange money.
While other digital currencies like Ethereum, Litecoin, and Z-Cash exist, many still prefer Bitcoin as the premier cryptocurrency due to its liquidity.
Most US citizens (at least sometime this past year and a half) have been on lockdown as a result of the COVID-19 outbreak. Meaning, they’ve been less likely to visit their bank.
With Bitcoin, they can “be their own back” with complete access to their Bitcoin account as long as they can access internet. And since Bitcoin has a limited supply, the price rises as more people buy it. Bitcoin’s supply is perfectly inelastic, but demand, for reasons such as avoiding germs, can spike at any time.
Governments
COVID-19 has caused lock downs in many parts of the world and as a result multiple economic crises, creating a general sense of volatility in the world's financial markets. In March 2020, the US government released a historical amount of monetary supply into financial markets, 25% of all US dollars in existence were “minted” in 2020.
For the first time, some of this stimulus also went into the pockets of every day Americans via direct deposit stimulus checks. While the stimulus deposits are not recurring at this time, it can be viewed as the first step to potential Universal Basic Income (UBI) the US population.
All that new money eventually flows somewhere, right?
Let’s take a look at two places.
First place the new money will go
The banking system serves as the first stop of this newly printed money. The Federal Reserve of the US are a buyer at Federal treasury auctions, with the specific mandate set out for the Federal Reserve by law--maximum employment, stable prices, and moderate long-term interest rates. When demand of Federal bonds drops too low such that it would spike the yields (interest rates) on the bonds, the Federal Reserve steps in to provide the market demand such that interest rates to not rise above the level they set. Eventually, this newly printed money flows downhill into the hands of someone wealthy who owned these bonds in the first place, and they will usually recycle the new money into some sort of financial asset (generating asset inflation).
The wealthy know what it’s like to put off buying a stock, only to see the price rise in the stock market until they can’t afford it. While cash and treasuries are nice options to have as liquidity, any sane investor over the past 50 years will advise you to choose a cash-generating company or a scarce asset, like Bitcoin or gold, to store your value in over time, and to only hold a small portion of cash and treasuries, whose supplies are limitless.
While Ethereum and other projects could be tremendously impactful on our financial systems of the future, no project is as ambitious in it’s aspirations as Bitcoin in attempting to be a new base layer global reserve money. Only time will tell if sovereign nations begin to fall prey to the game theory which could unfold where, “He who stakes his claim first will serve the most to gain.”
Second place the new money will go
The other place the new money flows is directly to people’s bank accounts. This cash mostly likely spent (consumed), but could also be invested in financial assets. The added consumer demand that would not naturally have occurred eventually causes consumer inflation, as the supply side for those goods are normally less elastic. This has been evidenced through supply chain slowdowns globally, empty lots of boat and RV dealers in 2020, increased price of lumber and homes, and empty shelves at the grocery store.
The wealthy folks who see their financial assets go up in value eventually decide to spend too. It might be a new car, new house, new boat, new clothes, new TV, new computer, etc. So eventually the financial asset inflation later leaks into increased consumer demand, and later consumer inflation as well.
As a result, buying something scarce with an good (such as dollars) that we know does not have a limit on supply is a wise strategy.
And since Bitcoin is the scarcest asset on the planet, it has a feedback loop during bull markets that is powerful - increase buying causes a shortage of coins available, causing price to go up, which causes mania and FOMO and more buying, leading to further price increases. On the flip side, the retail market can also be absent of demand for extended periods of time due to extreme fear.
Wrapping up
When we hear about the impact of the coronavirus pandemic, the news is often negative. When it comes to Bitcoin, however, the pandemic has played a huge role in its record growth.
The future of the global economy is really murky, but the future of the cryptocurrency market looks bright and the potential for a global renaissance based on reliable, trustworthy, decentralized money may be a real possibility.