Halving in the Time of Coronavirus

The halving of the number of bitcoins that come into circulation will soon be upon us. This is a known event, unknown is the state of the global economy post the global pandemic. P&L’s Julie Ros caught up with a wide range of digital asset market participants to gauge their views on the role the digital currency may play in the future.

As the number of bitcoin that can be mined (aka, block reward) is cut in half when the highly anticipated halving occurs at some point in May, will the now 11-year-old digital currency see a price surge, and if so, how sustainable will it be? Will the continuing pandemic-related shutdown and resulting economic distress provide an opportunity for bitcoin and other digital assets to prove their long-term viability?

Looking first at the halving – when the number of bitcoins (BTC) entering circulation every 10 minutes drops from the current 12.5 to 6.25, industry experts are mixed on whether the event has been priced in or whether scarcity will play a factor.

New York-based Christine Sandler, head of sales and marketing for Fidelity Digital Assets, the virtual currency custody and trade execution platform, notes there are two schools of thought. “From an efficient market perspective, the halving does not represent new information,” she says. “Market participants have known about the algorithmically scheduled decline in issuance that occurs approximately every four years. Assuming bitcoin markets are efficient, the argument goes that this information is priced in. To the extent discourse about the halving, which reinforces bitcoin’s value proposition as a scarce asset, attracts new investors to bitcoin, it could have an impact.”

Michael Moro, CEO of institutional digital currency trading firm Genesis Trading in New York, takes a lesson from history. “Based on how bitcoin has performed historically after previous halvings, a price surge has been the expectation,” he says. “Ultimately though, I believe that the sustainability of the surge is more dependent on factors that would drive the demand side, rather than a constriction of supply, although I would concede that scarcity can often affect demand as well.”

In defense of scarcity, Ryan Rabaglia, head of trading at Hong Kong-based digital asset platform, OSL, believes the halving will have a positive and sustainable impact on the market for the foreseeable future. “As we’ve been moving closer to the halving, of course global markets are in a state of flux, but overall BTC’s resilience has persisted,” he says. “There are a few key drivers to this, but the halving is still one of the most economically sound drivers remaining.”

But Chicago-based George Michalopolous, head portfolio manager of Typhon Capital’s Leonidas Cryptocurrency Fund, questions the relationship between the halving and price. “While there is a rationale, the mechanical causality is more ambiguous in our opinion than many market participants would have you believe,” he says. “This will be the third time bitcoin has halved, so there is some precedent for this.”

In this vein, London-based Maxime Boonen, founder of cryptocurrency market making firm B2C2, notes that in the past, the market may have reacted with a sustainable halving rally, but doesn’t anticipate a repeat this time around.

Drawing a parallel with oil markets, Boonen says: “First, mining costs do not operate as a floor on bitcoin’s price. If the costs of miners increase, some will have to cease operating, but that does not represent an unexpected change in bitcoin’s supply.

“Secondly, a price already represents the intersection of supply and demand: the price of oil dropped because there was an unexpected crash in the demand for oil,” he continues. “For a bitcoin rally to take the market by surprise, there would need to be a surprise change in supply, yet bitcoin mining rewards follow a predetermined schedule. Whilst it can be argued that the subsequent reduction in supply contributed to bitcoin’s rally four years ago when bitcoin was in its infancy, this halving has been top of mind since 2018. Just like the oil market cratered in anticipation of a drop in demand, chances are that bitcoin’s price already incorporates the halving.”

Kevin Beardsley, head of business development at London-based Kraken Futures, a trading platform for derivatives on digital assets, suggests that If the Bitcoin block reward halving has an impact on the price of bitcoin, it will likely be due to market perception (aka herd mentality), rather than a direct impact from the halving itself.

“If we assume a bitcoin price of $7,000, then the current daily block reward is $12.6 million (12.5 BTC per block *6 blocks per hour *24hours). So when the block reward is halved, it means $6.3 million in BTC is no longer entering the market each day,” he says. “A quick look shows ±$180 million in 24-hour volume on BTC/USD pairs only at Kraken, Bitstamp and Coinbase. That doesn’t even include the $500m+ BTC/USDT markets on offshore exchanges.

“So for the price to go up purely due to the halving, you have to assume two things. First, that miners are selling all of their mined BTC more or less in real time – I have reason to believe this is not the case – and second, that a $6.3m reduction in selling demand (3.4% of daily fiat volume, 0.9% of Fiat+USDT volume) will have a noticeable impact on the market. Bearing in mind there are individual traders every day who buy or sell that amount as a normal course of business,” Beardsley continues. “So, if the reward halving does impact the price, it is more likely to be from market perception (everybody thinks the price will go up, so people start buying), rather than a direct impact from the reduced supply itself.”

Meanwhile, Arthur Hayes, co-founder and CEO of cryptocurrency exchange BitMEX in Hong Kong, believes market dynamics are what they are, unpredictable. “All else being equal, a lower block reward should result in lower new supply entering the market, which should boost the price,” says Hayes. “But all else is not equal; there are all kinds of other factors at play. Therefore the price could do anything,” he says.

“There is a lot of trading volume in crypto markets, driven by a high degree of retail speculation and volatility, with billions of dollars’ worth of coins flowing back and forth and round in circles,” Hayes explains. “It is therefore unlikely the halving causes a short-term price surge as the $6 million or so which is being deducted from the daily supply won’t have much of an impact relative to the large trading volume. If the halving goes well, maybe the bitcoin price rallies 2% on the day, due to the news and excitement of the halving, but that won’t be meaningful or sustainable. However, over six months it represents over $1 billion of supply being taken out of the system compared to the previous block reward. This may be a large enough quantity to impact the price.”

Echoing these sentiments, Peter Johnson, a principal at Chicago-based Jump Capital, points out that it’s very hard to accurately anticipate near-term price movements in any market, so the price of bitcoin could go either way after the halving.

But long term, Johnson says he looks at the supply and demand dynamics of bitcoin. “From a supply perspective, the halving obviously reduces new supply coming into the system. On the demand side, the most important source of demand is long-term investors,” he says. “Traders and speculators contribute to both short-term supply and demand – and drive much of the volatility. Over the long term, I believe that price will be driven by the available supply coming into the market and the demand by long-term investors.”

Also looking longer term, Joel Kruger, currency strategist at LMAX Group, which operates multiple institutional exchanges for FX and crypto currency trading, including LMAX Digital, based in the UK, takes a different stance. “We’re not convinced the market will surge for any meaningful period of time as a result of the halving event. For one thing, we believe the event has been well telegraphed and markets do a good job pricing in what they can anticipate,” he says. “We would also highlight the fact that 85% of bitcoin is already in circulation, and as a consequence, we believe the notion that there will be a surge in demand because there are less new bitcoin coming into circulation, is an exaggerated one.

“Overall, we expect a continued upward trend over the medium to longer term, but believe this to be less a function of one single mechanism and more as a result of the totality of bitcoin’s compelling economics,” Kruger says.

Overshadowing the halving though, is the coronavirus pandemic, notes Mexico City-based Daniel Vogel, CEO of Bitso, Mexico’s first cryptocurrency exchange, who has a different take on what will move bitcoin prices. “The higher unknown here is how the market will react to the massive amounts of money being printed around the world to fight off the economic effects of COVID-19. I believe there’s a big possibility that scarce goods (stocks, gold, bitcoin) will come off as the big winners in this massive QE experiment we’re seeing play out minute by minute,” he says.


Regardless of whether the halving gives bitcoin prices a boost or not, digital assets have tended to move in lock step for much of their existence. Will this trend continue?

Fidelity’s Sandler suggests that it will. “Digital assets are still highly correlated. Given bitcoin is the largest, most established digital asset, price action in bitcoin could drive the tail of digital assets,” she says.

BitMEX’s Hayes agrees: “Yes, it seems these cryptocurrencies are all highly correlated. We do not see a fundamental reason for this; however, we can’t ignore the correlation. Eventually this correlation could break down, but we could not say when.”

Bitso’s Vogel says that although he prefers less correlation, digital currencies do tend to move together. “I wish it didn’t, but it usually does,” he says. “Historically, as people make money on the appreciation of BTC, they tend to see other crypto-protocols as diversification – often without any real technological or logical reasons.”

“If you see a surge, it will mechanically carry over because most are still priced in BTC terms by default. Beyond that, a rising tide tends to raise all ships. So, yes, we think it would,” adds Typhon’s Michalopolous.

Genesis’ Moro largely agrees, pointing to the special status bitcoin enjoys. “I don’t think there’s any question that bitcoin is the flagbearer for the entire asset class,” he says. “While I can see a scenario in which other digital currencies see a price increase if bitcoin has one, I think it says far more about the critical importance of bitcoin and its influence than about any attribute of other coins. However, I do believe that we will see price increases in other coins that will be greater than what you might see in bitcoin, due to the relative illiquidity of other digital currencies.”

Jump’s Johnson suggests that the high correlation in price movements between bitcoin and other digital currencies may hold in the near term, but believes it will likely break down over time.

“Bitcoin is still the king; the other digital assets generally get their marching orders from it – relying on BTC performance and benefiting as a result,” adds OSL’s Rabaglia. “Its market dominance is well known and most trading pairs are priced in BTC across most exchanges.”

David Mercer, CEO of LMAX Group, sees the cryptocurrency space as still in a maturing phase. “Because of this, the market will generally look at what the price of bitcoin is doing and expect similar results in other cryptocurrencies. Broadly speaking, bitcoin’s success serves as a proof of concept and signal of the potential of this emerging asset class that is cryptocurrency, which should therefore carry over to the success of other cryptocurrencies.”

Concurring with this, Nigel Green, CEO and founder of Dubai-based financial advisory firm DeVere Group, suggests that the move from traditional currencies to digital is a process that will continue to grow. “A rising number of tech and institutional investors are opting for digital currencies, and with the expansion of the native digital generation, global demographics are also on the side of cryptocurrencies,” he says.

Wider Adoption

Looking over the longer term then, which factors are most likely to impact on the price of bitcoin and other digital currencies?

Acknowledging that bitcoin and other digital assets are still relatively young, driven largely by speculative activity and  essentially detached from macro events, Fidelity’s Sandler says that this is changing as the asset class becomes more “financialised and integrated”. “This could cause interest in bitcoin to be increasingly driven by the search for a scarce, alternative asset depending on market conditions,” she says.

Many of these coins have very different investment propositions, which should in theory imply their prices are driven by different factors, adds Hayes. “For example, a coin representing a world computer or high capacity/low fee payment network should trade like a risk-on asset. In contrast, bitcoin, which is often pitched as a highly robust system, capable of unblockable electronic payments, should trade more like a risk-off asset. This is clearly not currently the case, with the coins highly correlated and in some periods all trading like risk-on assets.

“As for bitcoin, in the long term, we think the price can be driven by the degree of inflationary expectations, and any government action to impose burdensome regulation on traditional payment systems as a tool to achieve economic or political objectives,” Hayes says.

Boonen turns to the ‘real world’ as providing underlying support for bitcoin. “I believe that low interest rates have been a major contributor to bitcoin’s popularity. Bitcoin’s big 2017 rally occurred at a time when inflation expectations were at their highest since 2013.”

He adds that public concern about financial privacy in a post-pandemic world could also support crypto prices, but that we are not yet at that stage.

Vogel highlights three factors likely to have long-term effects on bitcoin’s price. “Improvements to the technology and its providers (easier access and use), which leads to real use cases that will drive value (eg, network effects, mass adoption, etc), or trust in monetary/financial institutions collapses, making bitcoin one of the few alternatives,” he says, noting that any of these factors could have an impact.

Along these lines, Genesis’ Moro adds that factors driving longer-term impacts on bitcoin would be what the world is currently experiencing as central banks globally come up with ways to battle the economic shock of the current pandemic. “The pace at which money is currently being printed, the debt levels that are being accumulated and the acute consequences that may follow from all of these are some of the drivers for the ‘case for bitcoin’.”

Bitcoin’s birth was in a time of economic uncertainty and its success has been a mix of global socioeconomic factors combined with a lack of trust in our current system, notes Rabaglia. “With world governments once again proving that their most prominent tool in their toolboxes is quantitative easing, we’re again faced with an amazing opportunity to decouple ourselves from this broken system and establish a purely decentralised asset class,” he says.

Concurring with the bitcoin origin story, LMAX’s Kruger says: “Bitcoin was born out of a rejection of centralised governance and monetary policy that allows for the debasement of currency. We live in a time where ongoing, unprecedented monetary policy accommodation has perpetuated risk associated with currency debasement. This makes the idea of decentralised, limited supply cryptocurrencies highly attractive and should result in increased adoption. We believe bitcoin’s first-to-market appeal, mystery around the identity of its creator, and superb design, make it the most compelling in the decentralised, limited supply cryptocurrency basket.”

Beardsley, whose firm has been vocal about regulatory impacts on crypto exchanges, notes that regulation, specifically in the US, China, Japan, UK and Europe, has been and will continue to be the primary driver of accessibility to crypto markets, but inflation will also have a hand. “This will have the largest impact on prices in the long run, he says. “If there is a period of unusually high inflation, it could also drive increased interest in fixed-supply assets like bitcoin.”

Echoing the inflation aspect, Michalopolous sees increased utility through new functionality such as smart contracts, as well as an inflation hedge, which will be the “hardest money” should we actually see sustained, increasing inflation in dollar terms.

Additionally, Jump’s Johnson adds, “Since the overall supply of bitcoin is fixed, I think price is largely a function of demand. So the main factor will be how demand for bitcoin and other digital currencies changes over time. In particular for bitcoin, the demand for it as an asset that is expected to have a low correlation with other assets and do well in high inflation rate environments (ie, “digital gold”), will likely be a key driver.

Looking even further afield, Green notes that such factors as the coronavirus pandemic, the trade dispute between the US and China, and Brexit have all had far-reaching impacts on the interest in bitcoin “due to the mounting consensus that it is a safe haven asset”.

“As such, a rising number of institutional and retail investors are reviewing and revising their portfolios to hedge against such risks by investing in crypto,” Green says. “This will inevitably drive the price of bitcoin and other cryptocurrencies higher.”

The Interest Rate Impact

As major global economies move towards zero percent interest rates, most see this as having a positive impact on adoption of digital currencies.

Interest rates are pretty much at zero (or negative) around the world, and it’s likely to remain in this neighborhood for quite some time, says Moro. “If that’s true, inflation becomes much harder to control, particularly in countries outside of the US. Frankly, even for the US, the unprecedented level of Fed stimulus we’re seeing right now will have an eventual impact on inflation. As digital gold, one of bitcoin’s positive attributes is a hedge against inflation, and I believe it will perform well in an inflationary environment,” he says.

Boonen takes the low interest rate argument a step further. “All cryptocurrencies will do better in an environment of permanent zero interest rates and high asset prices, irrespective of their underlying merits,” he says.

“In a low/zero interest rate environment, the opportunity cost of holding a non-income generating asset is reduced,” Sandler adds. “To the extent countries must implement additional accommodative policy decisions, interest in fixed supply assets such as gold or bitcoin could grow.”

“To some extent,” adds Michalopolous, “it makes the opportunity cost lower of speculating in [digital currencies], but if the state of the world is highly deflationary (as we currently view it), in such a scenario the net effect is negative for price. BTC should benefit most in an inflationary world. Smart contract platforms like ADA should perform best in an increased functionality world.”

“Zero interest rates lower the appeal of holding traditional, fiat currency,” notes Green. “Furthermore, interest rate reductions usually result in higher inflation, lowering fiat currencies’ buying power. As a result, the attraction of bitcoin, and other cryptocurrencies is enhanced, and the price will move upwards.”

On the other hand, Beardsley points out that Japan has had interest rates at or below zero for most of the last five years, and interest rates have not been the driving factor of crypto adoption there. “As I understand it, changes in regulation have played a much greater role in Japanese crypto trading adoption,” he says. “It would be surprising if zero per cent interest rates drive crypto adoption in western markets when it wasn’t the key driver in Japan over the past five years. One thing to keep an eye on over the coming months is the effect a zero interest rate environment has on the fast-growing crypto lending sector.”

Comparisons with Gold

During the coronavirus pandemic, there has been a flight to traditional assets – the US dollar in particular. What are the chances of bitcoin becoming safe haven asset?

“Turning to bitcoin as a safe haven was never a rational stance to begin with, aside from its somewhat defensible analogue to gold as a supply-constrained commodity, which often rallies in the short term as a flight to safety…though in deflationary shocks we do not believe gold can maintain this flight to safety quality for long,” suggests Michalopolous.

“Bitcoin initially sold off along with most asset classes as there was a flight to cash (even assets traditionally seen as safe havens),” adds Sandler. “The move down was exacerbated by leverage in bitcoin markets, which has since come down. However, since mid-March bitcoin has recovered by almost 50%.”

“I think the conversation around bitcoin has changed,” Johnson puts forward. “In the past, when people asked me about bitcoin, they mainly seemed interested in the speculative potential to 10x or 100x their investment. Now, when people ask me about bitcoin, it is much more often in the context of having an allocation to an asset that might perform well as a hedge against the potential effects of the mass worldwide money printing that is occurring in response to the current crisis.”

The common expression that “in times of crisis, all correlations go to one” has proven true again, at least in the early days of this coronavirus crisis, suggests Moro. “The OPEC/Russia oil situation in early March combined with the government-forced quarantines for economies around the world created extreme volatility in all markets (commodities, equities, fixed income), and it certainly spilled over into digital currencies with bitcoin experiencing its second largest intraday drawdown on March 12,” says Moro. “Bitcoin certainly didn’t act as a safe haven that week, but frankly, it’s hard to argue that anything did other than the US dollar. I think that today, bitcoin is more effective as a safe haven in a currency crisis situation, rather than in an economic crisis situation.”

“Bitcoin’s growing consensus of being a safe haven asset is due to the fact it is a store of value, scarce, perceived as being resistant to inflation, and a hedge against turmoil in traditional markets,” adds Green. “The cryptocurrency’s ‘digital gold’ status is reinforced – it is known as digital gold as both gold and bitcoin share key traits, including being a store of value and scarcity. Moreover, bitcoin came about during the financial crisis of 2008-09 as people became increasingly angry and disheartened with traditional financial institutions. It is highly likely the current pandemic and subsequent financial downturn will spur on people to buy into crypto and start-up crypto-related businesses.”

If bitcoin were a flight-to-safety asset, a ‘canary in the coal mine’ would be the AUM of the Grayscale Bitcoin Investment Trust, notes Beardsley. “It is a listed fund, so they report their daily AUM publicly. If bitcoin was a flight-to-safety asset over the past few weeks, I would expect the GBTC Trust to have seen an appreciable increase in inflows as investors seek bitcoin exposure,” he says.

In fact, weekly inflows have dropped off in the past 3-4 weeks:

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“Also, the bitcoin price and the S&P500 have been highly correlated over the past weeks, further indicating it is not a flight-to-safety investment,” Beardsley adds.

Taking the other side of this argument, Kruger believes there has actually been evidence of bitcoin’s flight to safety appeal during the global coronavirus crisis. “When stocks continued to extend declines to multi-month lows in mid-March, bitcoin managed to find demand. The resilience of such a fledgling asset is remarkable given the performance of some more traditional instruments,” he says. “At the same time, it’s important to recognise bitcoin is still a maturing asset in its infancy, yet to fully realise its longer term potential as a flight to safety, store of value option. This means bitcoin is also identified by many market participants as a risk correlated, emerging technology, and therefore potentially exposed to periods of global risk liquidation while it continues to work towards proving its longer-term potential.”

Making a Case for Fiat

Do the levels of economic devastation resulting from the global pandemic demonstrate the need for governments’ and central banks’ use of fiat to smooth the economic effects the virus is having on individual countries’ economies?

Making a distinction between the roles of policymakers and central banks, Kruger notes that, “Governments are meant to promote the general welfare of the public, while central banks have a responsibility to ensure the health of the economy through price stability and maximum employment. To that end, we would expect necessary reserves would be built up to contend with shocks to the system. Absence of such reserves would not be ideal and would force governments and central banks into money printing exercises that could lead to the debasement of currency.

“At this early stage, most major governments have introduced already significant stimuli, but more will be required if the IMF prediction of a 3% contraction in annual GDP holds true. Specifically in the UK, where the OBR predicted a 35% Q2 drop in output, we should expect more government and central bank intervention,” he adds.

Jump’s Johnson notes: “The economic cushion that is being provided by current monetary and fiscal policies does demonstrate the value of a flexible fiat currency in smoothing economic cycles,” notes Johnson, while Michalopolous concurs that, “Governments will need to use fiscal and monetary methods to help smooth this depression-level global shock.”

But BitMEX’s Hayes takes a different tack: “The virus is first and foremost a health crisis. The trouble is that going into this health crisis the financial system was extremely fragile. There is a huge amount of debt in the economy, both in the corporate sector but also on the buy side of the investment management industry. Now of course one person’s debt is another person’s asset, so the system reconciles. However, large amounts of debt still cause instability, between the two different groups, savers and borrowers. At the same time, there is a large amount of both inflationary and deflationary forces in the economy; two large tectonic plates locked into place, producing a seemingly benign environment. However, this is an unstable system, at any moment there could be a shock to the system and large inflationary or deflationary forces could spin out of control, an economic earthquake if you will.

“How did we get here?,” Hayes asks, “It was 30 years or so of an economic regime of lower and lower interest rates, responding to every little bump in the road with a looser monetary policy. A central bank put. Suppressing volatility, causing asset prices to go up and up and ensuring the level of debt in the system continued to increase. Papering over the cracks each time a problem occurred, but also sowing the seeds for the next crisis and ensuring the next crisis would be even worse. This virus was the catalyst for a financial crisis, but it was not the cause. If it was not the virus, something else would have come along. The cause of this financial crisis was the economic regime we had in place.

“We think the old economic regime has reached the end of the road,” he continues. “With respect to the old set of tools: quantitative easing, lowering interest rates, opening up credit lines to foreign central banks, direct involvement in the repo market and direct loans to banks, this is as far as we can go – any further action won’t have much more effect, even in the short term.

“We will now shift to more direct fiscal action – “QE 4 Da People” – marking an economic regime change. This could consist of policies like direct payments to individuals (via UBI type systems) and grants to small businesses. In our view, there will be one long-term winner under this new regime, inflation,” Hayes concludes.

Enter CBDCs?

What role, if any, should a Central Bank Digital Currency (CBDC) play?

CBDCs may emerge when commercial banks fail to do their jobs, says Hayes. “If they fail to provide loans to small businesses and the public (perhaps due to the burdensome regulatory regime), the government may step in and allow the public and small businesses to have accounts directly at the central bank,” he says. “Democratic congresswoman Rashida Tlaib has already made such a proposal. If CBDCs are adopted, it is likely to be out of political pressure, driven by a failure of traditional financial systems. If the traditional transmission mechanism between the central banks to the economy, via commercial banks, is broken (which it is), then they may need to try something new and more aggressive. CBDCs could be part of that.”

But, Hayes adds, CBDCs could have a detrimental impact on deposit taking institutions, as they provide an outlet for depositors to flee the banks to a credit risk free and secure electronic alternative. “Commercial banks will therefore find it even harder to play their traditional roles as finance providers,” says Hayes. “CBDCs will therefore mark a sharp political shift to the economic left, where governments are more heavily involved in providing finance to the economy and have increased control over which projects receive financing.”

Michalopolous adds: “The role they seek to carve out – which could be for something as simple as delivering fiscal relief more directly – realistically is not likely to happen in the next couple of years in our view. Eventually, we think that governments may try to implement fiat currencies on a private blockchain with interest rates, creation and destruction of coins, and automated taxation built-in to that private blockchain. This would ironically result in the exact opposite implementation from Satoshi’s design thesis of bitcoin as decentralised, free from government control, and supply-constrained.”

Moro adds: “The world has generally been moving in a digital direction in all facets for decades, and I do think that a natural extension will be the creation of central bank digital currencies (CBDC). Take the current situation where the US is providing $1,200 stimulus checks, and think about how much easier and faster it would be if individuals already had digital wallets and the Fed could deliver the money directly into them?,” he says, although adding that a concern around CBDCs would naturally be around government surveillance and privacy rights of citizens, which no doubt will be a very delicate balance to be struck.

Sandler believes CBDCs could be a boon to digital assets generally. “To the extent central banks roll out digital currencies based on distributed ledger technology, managing and transacting with blockchain-based fiat currencies could increase the familiarity people have with digital wallet technology and drive people to learn about other digitally native assets based on similar underlying technology that offer differing properties,” she says.

“The technology is obviously incredibly interesting and powerful. Digitising cash could have enormous long-term effects on financial inclusion – we have no better technological solution to digitising cash than through the principles of blockchain and crypto. The question is whether central banks (apart from PBOC) are ready to invest in a technology that could potentially be a fad and which still has significant limitations and technical hurdles,” adds Vogel.

When people talk about CBDCs, they are typically referring to central banks keeping the records of the money held by all individuals and businesses, points out Johnson, a role that is currently held by commercial banks. “I think it is unlikely that central banks will disintermediate the role of commercial banks in most countries, with potential exceptions in places that have extremely strong centralised government control such as China,” he says, adding that stablecoins issued by commercial entities are more likely than CBDCs to have a significant impact on the industry, as the former will provide an open network for anyone to access dollars (and other currencies).

“Central Bank Digital Currencies are a certainty,” exclaims Green. “China has been at the forefront of the cryptocurrency and blockchain space up to now. With the development of the digital yuan, defined as an ‘all-powerful cryptocurrency’, which could be ready this year and become the first sovereign digital currency in the world, the US – China’s economic rival – and other countries are following suit.”

Indeed, a recent survey carried out by the Bank for International Settlements of 66 central banks said that from January this year, 80% of those surveyed are now involved in some form of CBDC work, a 10% increase over the 2018 survey (which had 63 respondents).

“As well as bitcoin and other cryptocurrencies being digital and global, and the world becoming ever more digitalised and globalised, the fact that demographics are on the side of crypto, and that central banks, major organisations and institutional investors are all standing up and taking notice of digital currencies, prices will undoubtedly move upwards over the longer term,” Green adds.

On the flipside, LMAX’s Mercer says he doesn’t see any likelihood of CBDCs in terms of what we currently understand as digital currencies. “Banks with bigger balance sheets extending crypto credit into the real money segments is a distinct possibility, but a central bank will only be for state launched digital assets,” he says.

Mercer’s colleague Kruger adds: “Though a central bank digital currency is inconsistent with the vision of bitcoin, there would still be many valuable applications with such an implementation. These advantages include direct money transfers without the need of third parties, greater financial inclusion through low cost bank accounts, an easier way to track the location of every unit of currency, and the ability for central banks and governments to swiftly and directly deliver stimulus to the public.”

Looking Ahead

So what will drive prices through the rest of this year and beyond?

Beardsley says he will be watching to see if the bitcoin price can decouple from its correlation with traditional markets. “Looking ahead, there are so many crypto-specific and macro variables that can impact crypto prices that it’s hard to predict what will drive the change,” he says.

Digital assets like bitcoin are largely driven by sentiment and perception, adds Sandler. “Longer term, as the asset class matures, it could increasingly be driven by fundamentals (eg, network usage metrics such as transaction volume and growth in addresses or development activity), as well as external macroeconomic factors and events,” she says.

Michalopolous adds that liquidity and inflation dynamics in macro markets, as with every other asset class, will be the main drivers. “Inflation and utility are the only long-term drivers we care about in assessing sustainable upside,” he says.

Although next month’s halving will likely positively impact the price of bitcoin, it is increasing crypto adoption and real-world issues that will drive prices upwards, adds Green.

Succinctly summing up what will bring sustainability and wider adoption to digital assets, LMAX’s Mercer says: “Increased institutional Adoption, better Banking solutions and effective Credit. The ABC of Cryptoland.”

“We continue to see the price of bitcoin exposed to periods of intense risk off in the global economy, resulting from coronavirus fallout and exhausted central bank policy accommodation and government stimulus efforts,” says Kruger. “We think the price will be exposed to this risk given its correlation with risk sentiment as an emerging technology. At the same time, we also expect the price of bitcoin will find plenty of demand into dips from risk-off flow, as medium- and longer-term players look to take advantage of a discounted asset, on its way to realising its potential as an attractive flight to safety, store of value alternative. The crypto ABC will be the long-term drivers for the asset class.”

“As we step back and look at how bizarre this year began, for us all, it will indeed be the shocking level of uncertainty and fragility of the world that will continue to lend credence to the digital asset space,” concludes Rabaglia. “As the world tries to regain its footing after this first quarter of volatility, it will surely stumble and have after effects for the remainder of the year – and likely much further into the future. These new realisations that will occur will carry the weight of a changing world, one where this digital asset class of ours will prove to be a viable and transformational component to the new future.”



Julie Ros

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