Covid-19 and Crypto

By Peter Marshall and Joe Willis
March 26th 2020

As a result of recent events, governments around the world are shutting down parts of their economies, while simultaneously printing several trillion dollars at a time when their tax revenues are dramatically decreasing. Basic economics points to widespread currency devaluation as a result of this. We have already seen multiple fiat currencies begin to fall precipitously against the dollar over the last few weeks, and 76 countries have recently asked the IMF for emergency assistance. 1 Additionally, given widespread quarantines to stop the spread of the Covid-19 virus, business must now be conducted digitally.

Crypto provides investors with exposure to the rapidly growing digital economy, a hedge against inflationary central bank monetary policies, and a way to store value outside of the traditional banking system (similar to gold and silver, but in digital form).

Growing Issues
Negative Rates

When adjusted for inflation, almost all developed countries now have negative real interest rates. Negative interest rates could potentially undermine our banking system if they persist over the long-term, as rational actors will likely not continuously lend in return for a guaranteed loss.

Corporate Debt Crisis & Unemployment

Most of corporate America and a vast amount of small businesses are highly leveraged. The current economic shutdown is destroying earnings and could result in a cascade of defaults as debt servicing payments cannot be met. Subsequently, mass layoffs could occur causing unemployment rates to surge. We have already begun to see this play out as an additional 3.283 million Americans have filed for unemployment since last week, according to the Bureau of Labor Statistics.2

Government Intervention

The Federal Reserve has committed to buying a substantial amount of assets, including Treasuries, mortgage bonds, municipal debt, commercial paper, corporate bonds, and ETFs. These purchases are made using freshly printed dollars, significantly increasing the supply of the currency and weakening it in the process.

How This Situation Affects Crypto

As large portions of populations are on lockdown, we have seen an accelerated shift to the digitization of financial and social interactions. Businesses are being forced to adapt to this new remote and decentralized way of life that is now reality for the foreseeable future.

Opportunity & Hedge

We are seeing a significant decrease in consumer demand for most products outside of necessary staples as a record number of people begin to lose their jobs. Investors will have to reallocate their portfolios as many companies are not prepared for this new digital reality. Crypto is one of the only areas of the economy that will benefit from a purely digital business environment.

Crypto networks are decentralized monetary systems not controlled by a centralized entity. They have set supply curves that cannot be arbitrarily adjusted and provide public financial infrastructure for countries and companies to build financial applications and conduct transactions. In a world where some economic sectors are being shut down and commerce is forced to move into the digital realm, crypto provides investors a way to gain exposure to the growing digital economy and a hedge against fundamental issues facing our economy as a result of the virus and existing monetary policies. These networks simultaneously enable the storing of value outside of our banking system, similar to gold and silver. As the global financial system comes under more stress, and governments become increasingly active in the financial markets, investors are looking for new ways to store wealth and protect their financial privacy.

New Methods of Income Generation

With record unemployment emerging from this situation, combined with government mandated quarantines, many people will turn to crypto networks to generate income. Opportunities that exist within crypto networks include:

  • exchanging your data for payment in crypto
  • completing microtasks for payment in crypto
  • building open financial and gaming applications
  • blockchain interactions that produce passive income or rewards, such as staking
Why Bitcoin Over Gold

Bitcoin offers several advantages over gold, as shown in the table below. These advantages have been on display in the last week, as increased demand for gold coupled with supply chain disruptions have caused significant problems for investors looking to buy physical bullion:

  • the premium for physical gold is currently 10%, compared to the average 2%
  • American Eagles and Buffaloes issued by the U.S. Mint are totally out of stock
  • some dealers have said there could be delays of 15 or more days to get physical gold 3

Given the inherent characteristics of crypto, such as 24/7 liquidity, near instant settlement, and provable supply dynamics, crypto does not suffer from these issues.

Traits of Money table
Bitcoin’s birth introduced two new traits, “openly programmable” and “decentralized.” 4
Sources
  1. https://www.ft.com/content/6eca167c-6ec0-11ea-9bca-bf503995cd6f
  2. https://www.bloomberg.com/news/articles/2020-03-26/u-s-jobless-claims-surged-to-record-3-28-million-last-week
  3. https://www.marketwatch.com/story/there-is-no-gold-bullion-dealers-sell-out-in-panic-buying-2020-03-25?reflink=mw_share_twitter 
  4. https://medium.com/@danhedl/planting-bitcoin-sound-money-72e80e40ff62 

Disclosures: Walden Bridge Capital holds Bitcoin. The information included here is for general information purposes only. Nothing should be construed as, or relied upon as, investment, financial, legal, regulatory, accounting, tax or similar advice. Nothing should be construed as a solicitation to invest in any security, future, or other financial product, and nothing herein should be construed as a recommendation to engage in any investment strategy or transaction. You should consult your own investment, legal, tax and, or similar professionals regarding your specific situation and any specific decisions. 

An investment in any strategy involves a high degree of risk. There is the possibility of loss and all investment involves risk including the loss of principal. The description herein of any approach, targets, and strategy is based on current expectations and should not be considered definitive or a guarantee that any approach, target, strategy, and investment portfolio will, in fact, possess these characteristics. The holdings identified do not represent all of the investments purchased, sold, or recommended by Walden Bridge Capital, LLC (“Walden Bridge”). Any projections, forecasts and estimates are speculative in nature. No representations or warranties are made as to the accuracy, reliability, or completeness of any statements. All information is provided “as is”, without any warranty of any kind. Certain links, including links to other websites, are provided in this post. These links are provided as a convenience and do not imply Walden Bridge’s sponsorship or approval of any of these websites or their content. If you access any third-party website through this post, you do so at your own risk. All statements herein are the opinions of Walden Bridge, unless otherwise specified.

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