Picture: 123RF/123RF/pitinan
Picture: 123RF/123RF/pitinan

Despite notoriously volatile cryptocurrency prices this year, bitcoin has held its own throughout Covid’s economic carnage.

The world’s best-known cryptocurrency has just set a new record by closing above $10,000 over 85 days — a strong bullish signal.

The previous record — a 62-day streak — ended in January 2018, when bitcoin reached its record high of just above $19,900. The currency is now trading at around $11,917 or R201,000.

But views still differ about whether bitcoin is truly a safe haven asset. Many predicted that there would be a flight to it during the global market sell-off in March, but the currency declined along with global markets as investors liquidated their investments to obtain cash.

In fact, crypto and fiat markets initially followed very similar trajectories during the sell-off. Then the price of bitcoin began to move in the same direction as gold, bolstering the view that the currency is a safe haven asset.

We at Luno would argue that bitcoin has shown itself to be resilient in its first global crisis. After all, it was still on the finance sector’s fringes in the 2008 global market crash.

Bitcoin has outperformed traditional markets like the S&P 500 and gold this year — an indicator that a cryptocurrency is able to decouple from macroeconomic movements.

It helps explain the record trading volumes that we’ve seen in 2020.

The Luno cryptocurrency exchange, SA’s largest, now has 5-million customers across 40 countries. It has recorded sustained levels of new wallets (accounts) since March.

This has pushed SA to third place globally in cryptocurrency ownership, the primary use being for investment and speculation rather than as a method of payment.

The pandemic also seems to have prompted fund managers to re-evaluate their attitude towards cryptocurrencies. JPMorgan, whose CEO, Jamie Dimon, once branded bitcoin a fraud, has since changed its tune, stating that cryptocurrencies have longevity as an asset class.

Bitcoin has outperformed traditional markets like the S&P 500 and gold this year

Increasingly, institutional investors are diversifying their portfolios by actively buying such currencies. Bakkt, a fully regulated crypto futures and options market owned by the same holding company as the New York Stock Exchange, has had record bitcoin demand this year.

The world’s largest digital asset manager, Grayscale Investments, reported record inflows of $905.8m last quarter, of which 88% was institutional money.

Nasdaq-listed MicroStrategy, a business intelligence company, recently announced a second significant round of bitcoin purchases.

Worth around $425m, its bitcoin holdings are now the company’s principal treasury reserves.

A fundamental difference

So what is it that makes cryptocurrency attractive?

Bitcoin operates on a model of deflation, meaning that, over time, fewer and fewer bitcoins will be released to the market.

Supply will stop completely when there are 21-million units. At present there are 18.5-million in circulation.

This is the fundamental difference between it and fiat currencies, which use an inflationary model of central banks being able to print extra units of currency at will.

Zimbabwe and Venezuela are two examples of countries where excessive money printing caused hyperinflation and economic collapse. Some investors consider bitcoin a hedge against inflation.

The pandemic has also accelerated the case for blockchain technology, which is at the heart of cryptocurrencies, giving a glimpse of how they could be used in the financial system of the future. For example, blockchain technology could be applied to deliver a global, sustainable and scalable universal basic income.

In other words, the technology would make it possible to send money directly to citizens without the need for intermediaries, reducing both cost and potential corruption.

Already we are seeing significant signs of crypto adoption among mainstream payment companies. PayPal, for instance, is reportedly planning to roll out direct sales of cryptocurrency to its 325-million users.

As for increased regulation, we believe this will be an important catalyst for broader cryptocurrency adoption. In our view, it will provide consumers and service providers, like banks and auditing firms, with the comfort that the company they are dealing with is held to defined regulatory standards.

We applaud the Reserve Bank’s proactivity in putting forward a cogent proposal for regulating cryptocurrency in SA.

The crypto sector is attracting some of the finest talent in finance, economics and software engineering. It bodes well for the future.

  • Reitz is cryptocurrency exchange Luno’s GM for Africa

 

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