Coronavirus: pandemic could push investors towards Bitcoin
With uncertainty surrounding the economic implications of the coronavirus pandemic, cryptocurrencies like Bitcoin may represent opportunities for investors.
Bitcoin was the first and remains the most prominent of the thousands of cryptocurrencies available. The currency was launched in the wake of the financial crash of 2008 and was to some extent designed to help limit the impact of a global crisis.
Bitcoin price surges during crisis
Bitcoin is based on its decentralised structure which relies on owners of the currency to maintain the network. With no banks holding the currency or governments controlling the amount in circulation, in theory it is less susceptible to global crises like the financial crash or the coronavirus pandemic.
As was the case in the aftermath of 2008, both UK and US governments have used quantitative easing in an attempt to stimulate the economy during the ongoing coronavirus outbreak. Quantitative easing involves central banks like the Bank of England purchasing large amounts of financial assets such as bonds on the open market to increase the money supply.
The Bank of England describe it as a tool used to inject money directly into the economy, explaining, “Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds. The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy.”
But while it can help stimulate the economy in the short-term, it is not without its drawbacks. As the supply of a currency increases the value is likely to drop, making it less attractive for investors. In the medium-term, it also causes inflation. Bitcoin, devoid of central banks and government intervention, cannot be affected in the same way.
Last week, the online financial service Revolut announced that it would be adding a cryptocurrency facility to its banking app which currently has around seven million global users. Their plan had been to roll out the service later this year but the launch was brought forward to offer its customers “the opportunity to explore different ways of diversifying”.
However that is not to say that cryptocurrencies are free from the coronavirus-related uncertainty. In fact, Bitcoin experienced dramatic price swings throughout the month of March as the extent of Covid-19’s effect on the global economy was revealed. That month saw highs of over $9,000 and lows in the $4,000s in what was the digital currency’s most volatile month since January 2014, according to data compiled by Blockforce Capital.
The risks of investing in Bitcoin
While cryptocurrencies are divorced from the quantitative easing measures that standard currencies may face, they remain far more volatile and unpredictable than their more traditional counterparts. The lack of central regulation also makes them vulnerable to price gauging and other scams making them a risky bet for investors.
With so much uncertainty surrounding the nature of and the response to the coronavirus outbreak, investors in both traditional and cryptocurrencies will likely see more volatility in the months ahead.