Bitcoin and cryptocurrencies can take on financial risks

Bitcoin and cryptocurrencies are rapidly increasing in popularity. One of the reasons for this is declining confidence in fiat currency. Wilheim Roth and Dina Birla Portnar explain how cryptocurrencies can actually contribute to preventing financial risk.

In the first week of 2021, the impact of the latest US stimulus package on the markets was evident. Millions of Americans received a $ 600 check. This amount has been used by many to buy crypto assets. With new president Joe Biden, the economic stimulus will continue. On average, an American will receive $ 1,400 in relief for Covid-19 in the first quarter of 2021.

Many say this package is already priced into the market, but this is questionable, as the “new” created capital has not yet found its way into the market. Supply is already scarce and demand is still high.

Bitcoin is valued against the dollar

Covid-19 relief is important to the Dutch participants in the crypto market. Bitcoin is still valued against the dollar. Most of the trade is done in this currency. The dollar is also gaining strength against the euro, but it is still too early to talk about the Biden effect. Once the new dollars make their way to the market, the Bitcoin dollar exchange rate will increase. This also increases the price in euros, so that there are no differences between the different currency markets.

Covid-19 has a huge impact on the global economy. During the second quarter of 2020, the US economy is expected to contract by about 31.7% year-on-year. It was already known that the economies would be hit hard. Many believed that a rapid economic downturn would be followed by a rapid recovery, also known as a “V-shaped recovery”. Equity markets have already shown such a rapid recovery, but the economy has yet to live up to expectations. However, the optimistic tone about the economy has shifted to a more cautious one.

Financial incentive

With the United States as an example, many economists do not believe in a V-shaped recovery in the economy. A U or W recovery appears increasingly likely due to the inability to rapidly control the COVID-19 outbreak. Additionally, due to concerns about subsequent waves and virus mutations. The inability to quickly stop the virus outbreak means the economy cannot function properly and needs additional financial incentives to prevent it from crashing so badly.

Central Bank Printing Machine

Governments and central banks are trying to counter the negative effects of Covid-19 on the economy through both fiscal stimulus and monetary policy. While this can dampen the initial damage of the virus, it creates new, long-term problems. Government debt is on the rise, while the central bank’s printing machine is still in operation.

In the United States, the money supply has actually increased by 20% during 2020, while public debt has increased by 14%. Half of all dollars in circulation were made in the last 12 months.

Needless to say, this carries an increased risk of holding the fiat currency. People are increasingly worried that these measures will cause more problems for governments in the future. They also worry that central banks will not stop printing money. Rising public debt and an increasing money supply have been a problem for some time. However, people have recently become more aware of the new aggressive stimulus.

Store of value

Because of the risks and concerns, investors are increasingly looking to alternative assets to store their money and to spread or completely mitigate the risk of a fiat currency depreciation. While fiat currency has no real limit in potential supply and thus can be paid indefinitely, Bitcoin has a steady supply that creates scarcity and is seen as a store of value with strong discretionary capabilities, in part due to its increased acceptance.

Institutional investors flock to Bitcoin during times of uncertainty and uncertainty about the economy and fiat currencies. Now it appears that the major companies are starting to see the benefits of Bitcoin compared to fiat.

Cryptocurrency excels as an asset class

MicroStrategy, a US company listed on the NASDAQ, decided not long ago that owning Bitcoin was safer than holding securities. Therefore, the company bought $ 425 million worth of Bitcoin and exchanged its cash position. The CEO said this to say why the company is choosing Bitcoin:

“We found Bitcoin’s global adoption, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical usability, and community spirit as convincing evidence of the supremacy of this cryptocurrency as an asset class. This is for those looking for long-term storage. Bitcoin is digital gold – “Tougher, stronger, faster and smarter than any money that came before it. We expect its value to increase. This is due to technological progress, increasing acceptance and the influence of the network that has led to the emergence of many killers of the class in the modern era.

MicroStrategy understands the need for exposure to alternative investments to protect businesses from the increased risk of fiat currencies. The company sees what Bitcoin should offer as a valuable category.

Don’t rely on central banks and the government

You will likely follow more of these examples in the near future. Companies are spreading their risks by using some of their cash exposure to alternative assets like Bitcoin. The same is likely to happen to citizens who have savings and do not want to depend on central banks, government and a worsening economy. It is already clear among institutional investors that there is more investment in Bitcoin.

While recent economic developments are negative for the global economy, they could be quite favorable to the bitcoin price. Greater demand is created among those who wish to reduce their financial risk.

More than two authors: Wilheim Roth is CEO of Van Icoinic Capital. Dina Perla Portnar is a public relations expert.