COVID-19 & Bitcoin

COVID-19 & Bitcoin

If there is anything this virus has taught us so far, it is how quickly the world can fall apart. 

Per the World Health Organization, there was a pneumonia of unknown cause reported in Wuhan, China on Dec 31, 2019. It was declared a Public Health Emergency on Jan 30, 2020. The virus was named COVID-19 on Feb 11, 2020. As of Mar 23, 2020 it has infected more than 370,000 people and killed nearly 16,500 people. That is a death rate of about 4.5% so it is no joking matter. 

So what does COVID-19 have to do with bitcoin and crypto-currency? Plenty, but before we get into that, please stay safe, practice social distancing and don't panic. The world is going to look different, but it will recover. Humans are resilient creatures and, while change is never good while we are going through it, the end result is typically an improvement on what was.

First, let's take a look at our existing structure. We will focus on the USA, the #1 economy in the world. How is it faring under the pressure of the virus? 

In two weeks, the DOW Jones Industrial lost nearly 40% of its value from a high of about $29,600 to a low of about $18,225 from Feb 12th to Mar 23rd. Notice that Feb 12 is just after the virus was named a Public Health Emergency and given its name. Give or take, estimates come in around $8 trillion of value wiped out in a little over a month. The global market isn't doing any better. Businesses are shuttering putting people out of work by the hundreds of thousands, resulting in nearly instant poverty as most live paycheck to paycheck. Unemployment is estimated to top out at anywhere between 20% to 30%. 

Almost all governments are working to provide stimulus packages to their populations as a stopgap, but they will be woefully short and result in minimal effective impact while burdening national fiscal budgets with huge amounts of additional debt. Another pressure threatening the stability of financial markets worldwide is that federal banks are crippled since interest rates are at zero and there is nowhere to go except into negative interest rate territory, which is horrifying. The problem? We are already there with bond interest rates below zero meaning the government will pay you to use their money. 

Again, what does all this have to do with COVID-19, Bitcoin and crypto-currency? This pandemic may be the perfect storm for crypto. At the lowest level, some businesses do not want to accept paper currency due to potential transmission of the disease. That is fair, but even debit cards and credit cards can be transmission conduits for infection. Best estimate, the virus can live on plastic and metal surfaces for 3+ days. Nobody is 100% sure. 

The end result? The world will change. It will change to a more electronic environment with less chance of infecting through human interaction and contact. More people will work from home as the remote work force just got a 10-year jumpstart due to COVID-19 (#covid19). Additionally, businesss will change. More and more it will be conducted online. Card purchases (credit and debit) will continue as normal, but they will be based on fiat currencies. Is there an end to the fiat runway? It is still our primary wealth transfer mechanism, but it is a question worth asking.

Let's divert for a moment into 'store of value'. Cash is a liquid asset invented to create a way for two parties to trade for goods and services. If you hold cash, you are holding a liquid store of value. Cash is good as long as people have a common perception of its value. Gold and other precious metals are less liquid stores of value. Again, they hold value only as long as people commonly perceive they hold value.

How long will gold be a 'store of value'? That is unknown because holding title as a store of value depends on several things. First and foremost are whether the store of value is perceived as valuable. Secondly, it must have some function utility. Both of these don't bode well for gold or other precious metals.

What if I told you that gold had lost its value? You would say that is not possible and you would double check with someone you trust to make sure it had not lost value. Now, what if that person told you that gold was not worth as much? Interesting paradox because I just created a run on gold. Why? Surely it must take more than a rumor.

Let's look at "functional value". Liquidity: Gold cannot be easily transported or used as a method of payment. Due to weight and storage requirements, it is difficult to justify it as even a long-term store of value. Electronic forms of payment are much more convenient and are the norms of wealth transfer.

Scarcity: Value is, as we demonstrated, a perceived construct. If either party does not find value in an asset class, then there is no value to "trade" with and the class loses the underlying perception of value. Gold is only valuable because we all agree that it has value and assign a common value in comparison to another currency or asset.

Utility: We use gold for electronic components and various other uses such as dental and ornamental, but really what other use is there for us in gold that we deem it a store of value? Oil, for instance, is not as scarce, but it has a significant use in today's society. 

Enter in Bitcoin and crypto. If gold, currency or any other asset defined as a transferable form of wealth can be assigned a relative value, then the same is true for Bitcoin / Crypto-currency. The problem? We still attach crypto value to fiat currencies, but this is rapidly coming to an end and events such as this pandemic prove to the world that Bitcoin and select alternate coins deserve to stand on their own as a currency class. 

This is demonstrated by the correlation of the pandemic and how crypto followed fiat markets downward in a pattern that suggests crypto is tied to fiat currency. As people begin to realize that crypto operates outside the confines of typical currency markets, the value of a truly free market will begin to shine through. Each crypto, similar to fiat currencies, will act as its own currency class which is where the comparative basis will end up over time. It will still take some time and adoption to get there.

Bitcoin as its own currency class is easily transferred, it is electronic yet immutable, it has a finite amount so it will never experience inflation. Why has it not replaced currency if it is so great? We have to remember it has only been in existence for 11 years. The adoption curve has continued to grow slowly, but with drivers like COVID-19 (#covid19), the curve will rise sharply as individuals realize the utility and core strength of crypto versus fiat currencies. 

The world post COVID-19 will be a different place. None of us can be sure what will change and how soon, but things will never be quite the same no matter how hard we work to get back to "normal". Stay safe at home with your family and enjoy them. COVID-19 will pass and we will move on. 

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