Over the last couple of years, the term bitcoin has popped up in many of my conversations and for years l have not paid much attention to what this expression means and what it does. Initially l thought that the expression bitcoin referred to a gaming term or some sort of a betting app. On occasion, someone would say, “have you seen what bitcoin is valued?” at and l must admit, it did catch my attention, but with no serious interest at the time until now.
Bitcoin is a type of digital currency that emerged after the 2008 financial crisis. It allows people to bypass banks and traditional payment methods. It has become the most prominent among thousands of so-called cryptocurrencies. This new currency system relies on blockchain technology, which is a shared database of transactions, with entries that must be confirmed and encrypted. The network is secured by individuals called miners who use high powered computers to verify transactions, with bitcoins offered as a reward.
There are many million in existence, and the mathematical system controlling the generation of new bitcoins – which is decentralized and therefore has no overreaching institution such as a central bank. Currencies that we use today are all backed by a bank that is usually regulated by a government and guaranteed. There are several currency exchanges where consumers can swap traditional money – backed by governments – for cryptocurrencies, which must be stored using a digital wallet. However, finance firms have also created new investment products based on bitcoin and other cryptocurrencies, such as contracts for difference, which are used to track the value of an asset without needing to directly own it.
The development of COVID-19 vaccines could enable a swift economic recovery from the pandemic, at a time when governments and central banks are still providing vast amounts of emergency support – which could trigger a burst of inflation. Some investors view bitcoin as a store of value, similar to gold, which can hold its worth during times of economic stress or rising inflation.
This pandemic has created much panic within our society and directly on our economy. Consumer confidence has become very untrusting of our politicians and indirectly those that run our institutions, including our banking system. Trust in our leaders is at an all time low and many of us are not trusting of those that control and run our central banking system and our financial institutions. Yes, there are checks and balances built into our system, but these days, it seems that everything could be up for grabs. These times that create these uncertainties make us look to alternatives and aside from the old system of gold of which our economy was built on, bitcoin if you understand it starts to look much more attractive. In this marketplace where paper money has become almost nonexistence and where over 75 % of our shopping habits have gone online, digital or ecommerce transactions are used almost exclusively today.
If you make an online transfer using a bank, it verifies that you have the funds, the bank subtracts that amount from one spot in a giant database it maintains of accounts and balances and credits it in another. You can see the result if you log on to your account but the transaction is under the bank’s control. You’re trusting the bank to remove the right amount of money, and the bank is also making sure you can’t spend that money again. The blockchain is a database that performs those tracking functions – but without the bank or any other central authority.
Many financial experts are comparing bitcoin to gold…. gold has traditionally been a hedge against inflation. Governments can speed up their treasuries printing presses and thereby debase their currencies, but miners can’t flood markets with gold, goes the thinking. Part of bitcoin’s appeal lies in the fact that it isn’t controlled by government’s or their monetary policies, and that its supply is limited even more strictly than gold’s having help slow down the mining of new coins and production will cease entirely at 21 million coins. With the vast spending by governments and central banks in response to the pandemic raising fears of inflation after economies recover, more attention than ever is being paid to bitcoin as a digital gold, even as inflation remains muted.
People can buy the coins directly from exchanges like Coinbase, accredited investors can also invest in vehicles like the bitcoin investment trust, which tracks bitcoin’s price. Today investors can buy or sell bitcoin futures, and soon may be able to buy bitcoin exchange-traded funds, once regulators feel comfortable with the idea. However, the warning is that plenty of people who believe in bitcoin’s future think some wild rides lie ahead. The big runup in bitcoin’s price back in 2017 was followed by an 83% rout that lasted a year.
COVID-19 has left a significant footprint on the global economy, and for this reason, it had a substantial impact on the behavior of all financial instruments, including cryptocurrencies.
It turns out that the fluctuations experienced by the virtual currency market during this period reflect changes in other capital and commodity markets. This market has also shown relative stability during this difficult time. It is another proof that cryptocurrencies can be treated as a mature and full-fledged financial instrument.
In the first phase of the pandemic, when it was not known how the whole situation would develop, there was an escape from risky financial instruments to bitcoin. One could observe a positive correlation of bitcoin with financial instruments considered safe, such as the Swiss franc, Japanese yen, gold and silver. This digital currency over the years has had some very positive trends where it looked like it would start to dominate some economies. Bitcoin during these times has forced many to look to this currency as a possible option to stay current in this economy. When you peel back and try to understand this digital currency, it starts to make a lot of sense, especially in this environment where paper money is becoming the thing of the past.
Many of us still like to hold that cold hard cash and count it and believe as our parents have always told us to stash as much cash as you can under that mattress for a rainy day.
Well, it looks like that rainy day may be here and the need for that cold hard cash could be needed any day soon, it just may not be accepted when you pull it out of that mattress.
This digital currency called Bitcoin may just be that next form of payment for goods and services in the coming years. Keep it on your radar as you may be paying for your pizza one day with bitcoin.
Bitcoin may just be COVID Immune!