The impact of COVID-19 on the global economy is driving a series of profound changes, such as the digitization of commercial exchanges or the implementation of huge macroeconomic stimulus plans.
One of them is the use of cryptocurrencies, which are presented as a refuge for many investors and could play a fundamental role both as a financial asset and as a means of transaction.
An alternative to traditional coins?
In principle, it may be difficult to understand that in a context of economic uncertainty, markets turn towards assets that are perceived by many as unreliable. But if we do a deeper analysis of the reality of cryptocurrencies we will see that this assessment is not entirely correct. On the contrary, these currencies present a series of advantages that make them very attractive in the eyes of investors in the current situation.
The first thing we must understand is that the economic crisis has triggered the demand for money around the world. Let us remember that the losses generated by the measures of social distancing between individuals and companies, the increase in market risk and the fall in the price of financial assets have led to a general preference for liquidity.
This means that investors have carried out a divestment process, converting their assets into liquid money and increasing its relative weight in their respective portfolios.
On the other hand, companies and individuals that have seen their income reduced have had to consume their previous savings to meet their expenses and for many of them the priority today is to recover that capital in the form of liquidity, to have it available again before any other eventuality.
The consequence is that both the uncertainty of investors and the decapitalization of the private sector have generated a growing demand for liquid assets. However, the fact that this demand is channeled into specific currencies depends on the capacity of each of them to perform the three functions that humanity has always attributed to money: unit of account, medium of exchange and store of value.
A haven for investors
The advantage that cryptocurrencies offer is that at all times the total money supply will be predictable for investors, which is not the case with traditional currencies.
It is clear that the first two uses are applicable to practically any currency in the world, but not so with the third. The reason is that currencies considered unstable (either in the foreign market depreciating against other currencies or in the domestic market with high inflation rates) are not perceived by the markets as a reliable means of saving.
In other words, if a currency loses purchasing power quickly, savers will try to get rid of it as soon as possible instead of using it to hoard their wealth.
In this context, it seems logical that the demand for currencies traditionally considered safe (dollar, euro, Swiss franc, etc.) has increased compared to other currencies from emerging countries. However, even in the most developed economies, monetary expansion plans are being implemented, which may be perceived by some savers as a destabilizing factor in the value of their currencies.
Cryptocurrencies, on the other hand, sometimes have rules that allow the money supply to be more clearly controlled. This is the case of Bitcoin, whose maximum amount cannot exceed 21 million worldwide and its generation mechanism (data mining) is designed to gradually reduce the speed at which new money is created. There are also other currencies backed by gold reserves, such as PAX Gold.
In these cases, the advantage offered by cryptocurrencies is that at all times the total money supply will be predictable for investors, which is not the case with traditional currencies subject to the arbitrariness of the monetary authorities. The fact that the amount available in the market can be estimated can thus provide an additional guarantee for investors.
A worldwide phenomenon
A very clear example of this aspect is Argentina, whose currency has been subject to a constant devaluation in recent years. Faced with the prospect that their Central Bank will continue to expand the money supply and prices will continue to rise, many people have chosen to save in other currencies, especially dollars. However, the restrictions imposed on the purchase of foreign currency have redirected a part of this demand for money towards Bitcoin.
In April this year, a report by Arcane Research estimated that the demand for bitcoins in Argentina had grown by 1,028% since January 2018 as a consequence of the risk that the country would go into suspension of payments and the inflation outlook. At the end of September 2020, the price of 1 bitcoin was around 1.5 million Argentine pesos, which represented an increase of more than 50% compared to April.
The generalization of the use of cryptocurrencies in the region is not exclusive to Argentina either. In 2018 the Venezuelan government launched its own digital currency, the Petro, in an attempt to alleviate the dollar shortage. With less restrictive monetary frameworks, in recent months its use has also grown in other neighboring countries such as Chile, Mexico, Brazil, Colombia and Peru. In the rest of the world, Russia, China and Ukraine also stand out as the countries that bet the most on this type of currencies.
Another important advantage of these currencies is that they can be traded with increasing ease in a context where the digitization of the world economy is advancing by leaps and bounds, in part due to the confinement measures applied throughout 2020.
In this way, the growth of electronic commerce has prepared the ideal ground for the acceptance of cryptocurrencies as a means of payment to become widespread.
The mystery of cryptocurrencies
The inexistence of a State that enforces its use should not necessarily be a problem, but many investors see this as a source of uncertainty.
However, its use also has serious drawbacks that in practice limit its dissemination. Perhaps the most important of these is legal uncertainty, since in many countries there is not very clear regulation on the use of these currencies and there may be a certain degree of uncertainty about the legal consequences of their use.
Another key factor is the inexistence of a government that imposes its use and thus guarantees at least a minimum level of acceptance, even if it is required by laws of legal course. Although this has never been a necessary condition for the existence of a currency (in fact money predates the States), many people value it as an additional guarantee.
Finally, the price of cryptocurrencies in the markets has been subject to such a high degree of volatility that their character as safe-haven currencies has been reduced in some way. With an uptrend in 2019 (although not without shocks), Bitcoin collapsed in March 2020 losing 30% of its value and has been recovering in the months since. In general, the entire period has been characterized by sudden falls followed by strong rises, thus consolidating the volatility of this currency.
In conclusion, we can say that the changes experienced by the world economy seem to boost the use of cryptocurrencies, especially in those countries whose currencies do not constitute a safe value for investors. Although there are still many difficulties and objections to its use, none of them has been able to prevent its dissemination, for better or for worse.
This phenomenon, like the digitization of commercial exchanges or robotization, will undoubtedly be one of the great challenges of the new economy that awaits us.