Crypto’s Choice: Join the Financial System or Fight It

This has been an extraordinary year. Not for a century has there been a pandemic on this scale. And although far fewer people have so far died from COVID-19 than perished in the 1918-19 “Spanish flu,” the economic damage is probably far worse. Governments shut down large parts of their economies to try to prevent the virus from spreading, and borrowed heavily to support businesses that could not trade and people who couldn’t work. Central banks cut interest rates to the bone and poured money into financial markets to ward off a deflationary collapse. Now, as 2020 draws to a close, returns on investment are nowhere to be found, and there are rising fears of inflation. It’s no surprise, therefore, that 2020 is ending with a cryptocurrency boom. 

During 2020, the fortunes of cryptocurrencies have been determined mainly by central banks. When financial markets crashed in March, cryptocurrencies suffered an even worse fall than traditional asset classes. Bitcoiners would like us to believe that the halvening in May helped bitcoin’s price to recover, but the fact is cryptocurrencies recovered as central banks poured money into financial markets. Continued infusions of fiat money caused the prices of all assets to rise, and cryptocurrencies proved to be no exception. 

Related: DLT Regulation in 2020: Backwards or Sideways?

Fiat money injections by central banks have particularly fuelled the rise and rise of stablecoins, the ties that bind the crypto ecosystem ever more tightly to the existing financial system. All that fiat money has had to go somewhere, and thanks to central banks’ zero and negative interest rate policies, yield on conventional assets is all but non-existent. So why not have a flutter on the crypto markets, while holding an option to exit back into fiat quickly if it all goes wrong? Stablecoins may be more smoke and mirrors than a real safety net, but they seem to be giving growing numbers of people the confidence to trade cryptocurrencies. 

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The March crash also revealed that, contrary to what bitcoiners had hoped, institutional investors don’t regard bitcoin as a “safe asset.” They dumped bitcoin and poured their money into traditional safe havens – dollar, yen and Swiss franc. And bitcoin’s recovery since then has pretty much tracked the rise of stocks and corporate bonds, though with somewhat greater volatility. So it seems that despite all that central bank money printing, investors don’t see inflation as their principal risk, or if they do, they…