Should you invest in cryptocurrencies amid the pandemic?
By Kimmy Maclang
The market shock of the COVID-19 pandemic has affected people and businesses profoundly. As job cuts sweep across industries and companies move to cut back on costs, everyone—from titans of industries to ordinary workers—are bracing for the worst. But some are also choosing to see where the opportunity lies in these trying times.
Market turmoil is often an indication of how challenges pave the way for growth and point to areas of the economy that show promise. One growth area in the pandemic is the market for cryptocurrency, particularly Bitcoin (BTC), which was originally designed to thrive in a digital economy. Investors who see the potential of cashless transactions are pivoting to crypto as a crucial aspect of life post-pandemic.
What is Bitcoin and How Does it Work?
Bitcoin has been in existence for more than a decade, emerging from the aftermath of the 2008 financial crisis. As a virtual token, BTC is traded for the same purpose that fiat currency (physical money whose value is regulated by governments) is exchanged in the real world.
Unlike actual money, however, the value of Bitcoin is recorded in a system called blockchain, a digital and decentralized public ledger whose chain of codes—known as "blocks"—contains the entire transaction history of the virtual currency. In other words, it shows when, where, how many times, and across which wallets the cryptocurrency has been traded.
Because record-keeping is inherent in crypto transactions, the need for third-party regulators such as governments and financial institutions (i.e. central banks and banks) is eliminated. BTC and other crypto transactions are meant to be peer-to-peer, happening directly between end-users.
Is Bitcoin Just a Speculative Asset?
Blockchain as an innovative code system has helped to achieve Bitcoin founder Satoshi Nakamoto's vision of democratizing access to and streamlining control of one's assets. But the potential of cryptocurrencies to upend the concept of money in the digital age has also attracted investors who only want to make a quick buck through speculative trading.
Even before the pandemic, market observers and financial technology leaders had already been keeping an eye on investors who were using BTC as a safe haven in the event of another financial market crash, as well as those who were riding on the wave of the volatility of the emerging asset class. What they found was a heterogeneous mix of people entering the crypto space.
In an interview with CNBC in 2019, Luno CEO Marcus Swanepoel said only one in 10 people on his cryptocurrency exchange used BTC for transactions. The majority treated the currency as an investment more akin to "digital gold."
His observations are echoed in a recent study on Bitcoin investors which found that, despite the prevalence of speculators making headlines in the industry, there are crypto enthusiasts who invest in the market because they believe in the future of a blockchain-based currency system.
Speculators, on the other hand, merely "follow a momentum trading strategy," putting in more of their money when they're winning, but they also quickly "switch to a contrarian strategy" when at the losing end or as a strategy to short-sell the currency. In other words, speculators are the first ones heading for the exit when market volatility strikes.
There's a reason investors with a high-risk appetite entered Bitcoin investing early; some did so years before the 2018 bubble. As Swanepoel put it: "It's high-risk, but the returns could be astronomical." Often, investors who are in it for the long haul want a lucrative tech investment in their portfolio.
Fast forward to 2020, and investors have found that the challenges of the COVID-19 global health crisis are accelerating the shift to digital currencies.
The financially savvy who were betting on crypto when prices were comparatively low in the early months of the pandemic have seen their investments rising steadily. That's because they invest in digital currencies in the same way others invest in stock trading more diligently when it's a buyer's market.
Should You Invest in Bitcoin amid the Pandemic?
Like traditional markets such as oil or real estate, Bitcoin and other cryptocurrency markets aren't immune to the shock of the ongoing pandemic, but the impact hasn't entirely been negative.
Industries that rely on physical assets have mostly seen a slowdown in business and social activity. In contrast, digital assets and cryptocurrencies have been buoyed by an increase in liquidity in recent months, as governments pump cash into the economy through coronavirus stimulus packages.
Because cryptocurrencies are exchanged on virtual platforms, the market continued trading even when entire sectors shut down to stem the tide of COVID-19 transmissions.
As governments work to slow the spread of the virus, consumers are opting to minimize physical contact in their day-to-day business by using cashless transactions. This is where digital currencies come in. With social distancing measures in place, contactless and virtual payments as seen in BTC transactions are fast becoming the world's most convenient payment methods.
For businesses looking for a faster way to transact with clients and partners overseas, peer-to-peer transactions using digital currencies offer faster, cheaper and more direct borderless transfers.
Apart from these benefits, one of the most important advantages of Bitcoin is still the fact that Satoshi Nakamoto set a cap on the number of digital coins that can be mined, at just 21 million. This means the currency will retain its value, unlike fiat currencies that are subject to inflation.
As governments continue to keep their economies afloat by circulating more cash for businesses and consumers to spend, the likelihood of inflation follows. Some investors are turning to BTC as a hedge against this trend.
Which is the Best-Performing Asset?
Given how Bitcoin trading is digital and fast-paced, the market often appears more volatile than others, such as the precious metals market where silver and gold have long been considered safe havens during a recession. However, the volatility of the crypto market shouldn't deter investors from betting on virtual currencies if they believe in the potential of the asset in the digital economy.
While Bitcoin has earned its place in history as the world's first cryptocurrency, similar iterations, known as Bitcoin Cash and Bitcoin Satoshi Vision (which goes by the shorthand Bitcoin SV), further improve on aspects of the original.
Bitcoin SV, for example, expands the volume of transactions processed in a single block from Bitcoin's 1MB to 128MB. Meanwhile, Bitcoin Cash's block size limit is currently at 32MB. This makes Bitcoin SV superior to the first two iterations in terms of keeping track of transactions. For merchants and end-users, the feature also makes transacting on Bitcoin SV 11,000 times cheaper than on Bitcoin.
The three types of Bitcoins are distinguished by their purpose. Bitcoin functions like gold in that users tend to profit more from holding onto the asset over a period rather than spending it.
Bitcoin Cash works like money exchanged in everyday peer-to-peer transactions, such as purchases or fund transfers. Bitcoin SV, meanwhile, more closely follows Satoshi Nakamoto's vision of a simplified borderless currency system.
While older generations tend to buy gold and silver as one of their most tried-and-tested safe havens of wealth, younger generations are exploring digital currencies as one of their first big investments. But which asset performs better?
An analysis of the year-on-year growth of different asset classes showed the best-performing asset to be Bitcoin SV. Measuring Bitcoin SV performance between Q1 2019 and Q2 2020, investors witnessed the value of the cryptocurrency soar 147.5%, yielding seven times the return on gold and almost thrice the value of its predecessor bitcoin.
Whether one is investing in cryptocurrencies or any other asset class, one should first take time to learn money management tools to navigate their financial future more clearly and effectively. The COVID-19 crisis has shown how being smart about where you put your money in the face of market turmoil can spell the difference between a savvy investor and one who merely cashes in on trends.
If you are betting on the continuing rise of virtual currencies, then investing in assets such as Bitcoin, Bitcoin Cash or Bitcoin SV may be the right investment move for you. Considering how the high-risk market tends to yield high rewards, it's tempting to ride the current fascination as a way to get rich quickly. True crypto enthusiasts, however, look at growth in the long term, well beyond the pandemic.
About the Author: Kimmy is an experienced content writer with a demonstrated history of working in the internet industry. When she is not writing, she spends time outdoors with her dogs or crochets.