Interest in cryptocurrencies has always flourished during times of economic uncertainty. From its inception in reaction to the 2008 financial crisis to Brexit, hyperinflation in Venezuela and unrest in Hong Kong, cryptocurrency adoption has spiked in times of economic instability. It’s no secret that we are in the midst of one of the most uncertain periods of modern history right now. Between the Covid-19 pandemic, shifting international powers and disruptive innovations, the future has become more difficult to predict than ever before. This volatility leads to a burgeoning interest in alternatives to dominant, fiat-powered financial instruments a big win for cryptocurrencies and DeFi adoption.
Living in a blizzard of uncertainty
Unlike some of the more isolated instances of economic uncertainty experienced in recent history, we are currently living through a global period of anxiety fostered by the blizzard of health, political and technological change.
The Covid-19 pandemic has ensured that health is the greatest force driving government action as well as business and personal decisions. The International Monetary Fund cautions that though vaccine could stimulate a return to pre-crisis levels in some industries, most economies will suffer lasting damage and extreme poverty will likely rise for the first time in 20 years. Though about 55% of executives expect economic improvement in the next six months, the impact of Covid-19 has been far from equal across business sectors. Big tech companies like Amazon, Google and Facebook have profited from the increased emphasis on e-commerce, remote work and digital services. Meanwhile, ghost towns are popping up everywhere where tourism and hospitality-based industry once flourished.
Shifts in international powers further complicate the precariousness of the future. Though the United States remains at the top of the Asia Power Index, its lead over China has been halved since 2018. The US dollar has enjoyed a special position as default international reserve currency since the creation of the United Nations system after WWII, but China’s Belt and Road Initiative (BRI), which creates trade relationships and connections across Asia and Europe, could threaten that status. If China mandates that all 138 participating BRI countries use its fast-developing central bank digital currency (CBDC) the digital yuan the country wielding the greatest economic influence will be China.
The widening wealth gap between the world’s 1% wealthiest individuals and everyone else is yet another aspect contributing to growing financial precariousness. In the United States, the wealth divide between the richest and poorest families more than doubled from 1989 to 2016. The accelerating rate of technological innovation is only widening these gaps. Artificial intelligence and automation now threaten the jobs of truck drivers, customer service representatives, retail sales clerks, market research analysts and even doctors. The idea of universal basic income to support people whose jobs are being replaced with algorithms is but a band-aid to the greater problem the reality that the fiat economy is no longer working for the everyday person.
The good news we are resilient
If there is a positive outcome from all this economic anxiety and global confusion, it’s that people, businesses and governments are demonstrating extraordinary resilience. Innovations take off during transitional times, and we’re already witnessing how goods and services that offer solutions to the current challenges brought forth by the Covid-19 pandemic are thriving. For example, online stock trading platform Robinhood raked in $180 million in Q2 of 2020, a 198% increase from all of Q1’s $91 million. The rise in contactless payments has ensured that many more people have joined the cashless economy. This escalating interest in online investments and digital payments suggests a growing comfortability with online transactions that smooths the path to cryptocurrency adoption.
Why 2021 will see massive crypto and DeFi adoption
Given the growing economic uncertainty furthered by a global health crisis, evolving international power dynamics and increasing income and wealth inequalities exacerbated by automation and technological change, it’s natural to look to alternatives to the centralized systems that have created this havoc. Enter decentralized finance and peer-to-peer transactions using cryptocurrencies. When economic uncertainty grows, so does interest in crypto, and surging cryptocurrency prices and DeFi participation demonstrate that this period of economic uncertainty is no different from the others, except at an even greater scale.
Data from Grayscale shows that the Covid-19 pandemic led to an increased interest in Bitcoin investments in 2020, with more than 55% of US investors now interested compared to just 36% in 2019. Of the investors surveyed, about 63% expressed that Covid-19 impacted their decision to invest in Bitcoin. Indeed, the prices of Bitcoin, Ethereum, and other cryptocurrencies have shattered ceilings built back in 2018. The DeFi explosion and impending Ethereum 2.0 update are certainly contributing factors to crypto’s recent surge, but the greater market mover is and always has been an unclear economic future for fiat.
DeFi, which was valued at about $1 billion a mere seven months ago, has now surpassed $20 billion in total locked value in Ethereum-based protocols. Part of the reason for DeFi’s massive growth is the development of protocols that enable global access to financial services like lending, borrowing, savings and insurance that were previously inaccessible to anyone without a bank account. These more accessible systems offer a much-needed antidote to the centralized ones that have led to widening wealth gaps and economic downswings (like the 2008 financial crisis).
As the global pandemic continues to bankrupt businesses, put millions of people out of work and change the nature of many jobs, people have been forced to explore alternative sources of income and wealth generation. More people are online and learning to use digital technologies than ever before because of the shift to remote work, contactless payments and virtual communication. All of these factors combined create a ripe environment for cryptocurrency and DeFi adoption. 2021 very well could be the year Bitcoin surpasses $100K, Robinhood users become DeFi users and a majority of businesses with digital payments also accept cryptocurrency payments.
James Wo is an active investor and the founder of Digital Finance Group (DFG), a firm that manages investments in excess of $550 million. He oversees a digital asset fund that is largely outperforming the market and a VC portfolio that includes Polkadot and its ecosystem projects such as Bifrost, Tidal, Crust, Acala and more. He’s also managed investments in Brave, LedgerX, Bloq and Circle.
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