Holding fiat is becoming increasingly risky - icoinic
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Franklin Feringa - Fundamental Analyst - Icoinic B.V.
Franklin Feringa
Author
Analist

COVID19 has had a severe impact on global economies. During the second quarter of this year, the US economy is estimated to have shrunk by an annualized 31.7%. That economies would be hit hard was well-known. It was thought by many that the rapid economic decline would be followed by a rapid recovery, also known as a “V-shaped recovery”. The stock markets have already shown such a swift recovery, but the economy still has to live up to this expectation. However, the optimistic tone regarding the economy has changed to a more cautious one.

Economic turmoil

Taking the US as an example, a lot of economists do not believe in a V-shaped recovery of the economy. Either a U or W-shaped recovery seems increasingly likely due to the inability to quickly get the COVID19 outbreak under control with worries of a second wave of COVID19. The inability to quickly stop the outbreak in its tracks means that the economy is not able to function as it should and is in need of extra financial stimulus in order not to fall too hard.

Stimulus increasing fiat risk

Governments and Central Banks look to counter the negative effects of COVID19 on the economy through both fiscal stimulus as well as monetary policy. Although this might dampen the initial damage done by the virus, it creates new issues for the long term. Government debts are increasing while the printing machine of Central Banks stays on. In the US, the money supply has already increased 20% during the course of this year while government debt is up 14%.

Source: fred.stlouisfed.org

Needless to say, this brings an increased risk to holding fiat currency as people are becoming increasingly worried that these measures could lead to further trouble for governments in the future while also being worried that the Central Banks never stop printing money. Rising government debt and the increasing money supply have been an issue for quite some time, but people have become more aware lately due to the new aggressive stimulus.

Bitcoin as an alternative to fiat

Because of these risks, investors are looking at alternative assets to store their cash in order to either spread or entirely mitigate the risk of the declining value of fiat currency. Whereas fiat currency has no real limit to the potential supply and can thus be printed indefinitely, Bitcoin has a fixed supply which creates scarcity and is seen as a store of value with strong appreciative abilities partly due to the increasing acceptance and adoption of it. We have already discussed how institutional investors are flocking towards Bitcoin in these times of uncertainty and doubt regarding both the economy and fiat currencies. But now, it seems like regular companies are starting to see the benefits of Bitcoin compared to fiat as well.

MicroStrategy

MicroStrategy, a US company listed on the Nasdaq, recently decided that holding Bitcoin was a lot safer than holding fiat. Because of that, it recently purchased $425 mln worth of Bitcoin to replace its cash position. The CEO had this to say about why the company chose Bitcoin:

“We find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. Bitcoin is digital gold – harder, stronger, faster, and smarter than any money that has preceded it. We expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fueled the rise of so many category killers in the modern era.”

MicroStrategy understands the need for exposure to alternative investments to protect the company from the increasing risk that fiat currency brings and sees what Bitcoin has to offer as a store of value.

Increasing demand for Bitcoin

It is likely that we will see more of this in the future. Companies will spread their risk by using a portion of their cash to gain exposure to alternative assets like Bitcoin. The same is likely to happen to civilians who have savings and do not wish to be at the mercy of Central Banks, the government and a declining economy. We have already seen the trend among institutional investors of increased investment in Bitcoin. So while the recent economic developments are negative for the global economy, they could be quite beneficial to the price of Bitcoin as it creates more demand by those looking to mitigate their financial risk.

Luc Correia Cabrito