Why Are Cryptocurrencies Becoming Dominant in The Digital Economy?
Tesla Inc., the electric carmaker, announced last week that it had purchased $1.5 billion worth of bitcoin. BlackRock Inc. is said to have dabbled in the same waters as the world’s largest fund manager. Miami is even considering allowing people to pay their taxes in bitcoin.
Taken together, it’s further proof that blockchain, once the realm of outsiders, is creeping closer to the mainstream, with major corporations, states, and, yes, even former prime ministers secure enough in its future to use it or promote it.
Traditional financial pillars are now setting the groundwork for their responses to the digital currency boom, which has an uncertain future despite bitcoin’s total value reaching $1 trillion on Friday. However, the more important concerns might be about who else wants in, how they’ll do if they do, and how mainstream the movement will truly become.
“Who will be next, and what will push (Bitcoin) over the edge and set off the next wave?” In a note to clients last week, Craig Erlam, an analyst at New York-based foreign-exchange company Oanda Corp., asked the question. “It has rapidly become the most widely reported news story, which has never been a bad thing for the room, given its desperate need for acceptance.”
There are many reasons for bitcoin’s recent popularity. Both retail investors and, more recently, institutional investors believe in its merit. Another factor is that low interest rates seem to be raising the value of everything, prompting some investors to turn to cryptocurrencies as a way to get more value out of their cash.
The pandemic has also moved more and more trade online, moving customers away from cash and coins. COVID-19 has also prompted central banks to print large quantities of conventional money, adding to the speculation that bitcoin with other altcoins could act as a buffer against a future inflationary burst and currency depreciation.
In a speech on Feb. 10, Bank of Canada deputy governor Timothy Lane said, “The recent rise in (cryptocurrency) prices looks less like a trend and more like a speculative mania — an environment in which one high-profile tweet is enough to cause a sudden leap in price.”
There may be debates about the merits of cryptocurrency, but there is no denying that an increasing number of mainstream players are getting on board somehow.
Mastercard Inc., for example, announced earlier this month that it would begin actively promoting such cryptocurrencies this year, which will allow for a new type of payment between consumers and businesses.
“Players that are valued in the market are increasingly adopting bitcoin,” said Elliot Johnson, chief investment officer, and chief operating officer of Toronto-based Evolve Funds Group Inc., which launched a bitcoin exchange-traded fund on Friday (ETF). “And that is motivating for everyone in the room because it further establishes the asset’s legitimacy.”
Bank of New York Mellon Corp. announced on Feb. 11 that it was creating a business unit that would allow for the transition, safekeeping, and issuance of digital assets. The Big Six commercial banks in Canada are as mainstream as they come, but any cryptocurrency-related plans they may have are likely to be stifled.
Still a long way to go
For one thing, according to Rob Colangelo, senior vice-president of, global financial institutions division, at DBRS Morningstar, their accounting system means that cryptocurrency will not be considered cash on their balance sheets.
Unlike, say, Tesla, buying a chunk of bitcoin would not allow Canadian lenders to get a better return on their money. In the meantime, they’d be dealing with the risks that come with cryptocurrency ownership, especially its volatile price movement.
“I don’t think you’ll see the big Canadian banks play a major role in the cryptocurrency boom that’s happening right now before there’s some normal regulation around the globe,” Colangelo said.
Regulators may tolerate Bitcoin, but that does not mean it will be promoted as the next big thing. The Bank of Canada, for example, can easily be classified as a crypto-skeptic. According to Greg Taylor, chief investment officer at Purpose Investments, the developments in the cryptocurrency sector should be familiar because the same thing happened with gold.
You don’t need a vault to buy gold anymore; all you have to do is buy a gold ETF. Investor interest for a bitcoin ETF appears high so far, with tens of millions of dollars in trading volume already seen in Purpose’s fund.
Cryptocurrencies seem like a logical advance of the economy as the world advances as well. Quick transfer, without many papers and higher security, makes it much more sustainable for the future. People trade currencies more than ever, prompting the trading market, and we are yet to see what changes cryptos will bring. There sure will be plenty of good ones.