Economic, political and human consequences of Covid-19 are hard to overstate. While some parts of the economy have recovered, the service sector continues to struggle. Consumer spending on services, for example, was down about 17% year-on-year in the third quarter. Despite the overall uptrend over the last six months, as indicated by the ISM Services Index, some industries, like hospitality, remain depressed. Unemployment rate in hospitality, which includes restaurants, hotels and casinos, was 15% in November, up from 5.7% in February. In less than a year, the industry lost more than 3.4 million workers. The economic wellbeing of the US has improved in the second half of 2020, but according to the Bloomberg Economics’ weekly dashboard, many high-frequency indicators are flashing red again.
The stock market experienced the fastest drop of 30% or more in history - the S&P 500 took 22 days to achieve that milestone. Coupled with elevated volatility and unprecedented scale of the pandemic, many investors remain on edge. While the indices have since staged an improbable and surprising come back, the stock market is not indicative of the overall economy. The pandemic has disproportionately affected small and medium-sized businesses, benefiting large public companies. Pharmaceuticals received a considerable boost due to their vaccine efforts. So did tech companies and retail giants, offering anything from home office equipment to furniture and home reconstruction necessities. Despite the stock market rally, some investors believe that current levels are unsustainable, only possible due to unlimited monetary stimulus.
One of the main stories of 2020, however, has been the evolution of Bitcoin from a peer-to-peer payment network to a fully-fledged digital gold and a store of value asset. Digital gold has been the main narrative of the Bitcoin community since 2017 when Bitcoin Cash split off to pursue the original peer-to-peer cash vision. In a highly volatile and uncertain environment, Bitcoin presented itself as an effective diversifying asset and macroeconomic hedge.
Despite the challenging regulatory environment and the global pandemic, Bitcoin offers something that is increasingly rare – programmable scarcity. Its monetary policy is hardcoded, predictable and limited to a maximum supply of 21 million coins. With unprecedented global stimulus and broader adoption of the concept of debt monetization, Bitcoin's monetary policy offers an attractive proposition. In the US, the Federal Reserve has expanded its balance sheet from $4 billion at the beginning of the pandemic to over $7 billion. In fact, the Fed printed approximately 20% of all the outstanding US dollars just last year.
Outside of the US, millions of people around the world are subject to capital controls, currency devaluation and censorship. It is no surprise that many of them are turning to Bitcoin. Earlier this year, the digital currency hit fresh all-time highs against most major currencies.
On a countless number of metrics, Bitcoin is seeing significant adoption. For instance, the overall number of Bitcoin wallets is at an all-time high, and the institutional participation is evident by looking at open interest in Bitcoin options and futures. Even Main Street investors are flocking to Bitcoin lured by its low barriers to entry and inherent security. According to Ben Weiss, COO of CoinFlip, "in the last 6 months, more Bitcoin ATMs have been installed than the last 5 years combined." The company has already rolled out over 1,000 machines across the US and supports ten major cryptocurrencies. An increase in Bitcoin ATMs is most likely linked to soaring retail investor demand.
"People are looking at Bitcoin as a safe-haven asset," said Weiss. He thinks that "Bitcoin feels like a safer and more stable investment than more traditional investments."
Many Wall Street investors and fund managers agree, adding to their Bitcoin positions as a hedge against inflation and macroeconomic risks. Last month, Mass Mutual - an insurance firm founded in 1851 – announced that it invested $100 million in Bitcoin. After the initial $425 million investment earlier this year, MicroStrategy raised another $550 million in senior convertible notes in December to invest in Bitcoin. According to Jeff Dorman, chief investment officer at cryptocurrency hedge fund Arca, "most conservative people on Wall Street don't want to be the first and don't want to be the last." However, "once there's that precedence set, I think it opens the floodgates for everyone else."
The stage is set for the global adoption of Bitcoin to accelerate further in 2021. Cryptocurrencies, in general, solve plenty of real-world problems. They enable easy and frictionless international transactions, for example. They give people in inflation-riddled economies countless options to store their wealth, either in a stable USD-pegged coin or a store of value asset like Bitcoin. Decentralized finance applications exceedingly provide traditional financial services like lending and borrowing, with attractive yields on deposits. At the same time, Bitcoin and other cryptocurrency products are inherently fair and don't exhibit the same discriminatory and often predatory practices that are common in traditional finance. According to a study by McKinsey, the US economy misses out on between $1 trillion and $1.5 trillion in GDP every year, due to the racial wealth gap.
As the direct outcome of Covid-19, we have accelerated the adoption of technological solutions like contactless payments and remote work by several years. Bitcoin, to a certain degree, is a technological solution to our inadequate banking industry and faulty monetary policy. It offers significant economic benefits and can act as a stabilizing asset in investment portfolios. As the Biden administration pursues further stimulus to support the struggling US economy, the fundamental case for investing in Bitcoin will only grow stronger.