Crypto-Refuge or the New Market Reality

Extraordinary situations require extraordinary measures. Some people are now using Bitcoin as an extraordinary measure to avoid a decline in their purchasing power. Those who decided to invest in this cryptocurrency have seen it reach US$10,000. However, crypto asset volatility can represent a million-dollar opportunity for some investors, but lead others to bankruptcy. For example, the value of Bitcoin plummeted in March of this year to a low of US$5,000, but it recovered in the midst of the health crisis, as did certain other assets. Without a doubt, Bitcoin is the new refuge that more than one investor sought.

Behind this trend is the performance cryptocurrencies achieved in 2017, the year in which the value of Bitcoin grew more than 1,000%, while other lesser known cryptocurrencies, such as Ripple and NEM, were the biggest winners, posting sky-high growth percentages of 36,018% and 29,842%, respectively. This huge appreciation falls precisely within the definition of financial bubble. Yields were excellent for those who invested at the early stages and reaped gains at the highest peak of the chart.

Bitcoin and other altcoins have gained integers unlike the bubble generated in 2017. According to Fidelity Investments, an estimated 36% of the main investment institutions in Europe still hold assets in bitcoins and other derivatives, while in the United States the figure is 27%. This appears to be in line with some banks' proposal to endorse Ripple (XRP) or Facebook's endeavor for Libra to finally see the light of day. Although these returns seem interesting, we cannot ignore the risk in the equation.

The risks associated with these investments come from different sources. One of them is hype, great expectations artificially generated by the overvaluation of the qualities of cryptocurrencies. Another risk is related to FOMO, acronym for fear of missing out, or in other words the fear of being left out of the equation. Another type of risk is the security of the cryptocurrencies themselves on stock exchanges and in portfolios or wallets. In all three media, security flaws have fueled increased protection and shielding from potential attacks.

The third type of risk is the volatility caused by the appearance of new technologies and the gap between initial adaptation periods and normalization in the market. Associated with this, liquidity risk means that as virtual money is increasingly adopted (availability and acceptance), liquidity will be enhanced, generating attractive financing opportunities for cryptocurrency exchanges. Finally, there is a fiscal and regulatory risk, a largely undefined gray area in most countries.

Meanwhile, China has given its citizens an opportunity and a chance for the world to see cryptocurrencies working. The pandemic has created such a disruption in the markets that it has given rise to a new virtual currency that could change the relationship between money, economic power and geopolitical influence in this country and across the world. After five years of construction, China's official digital yuan has been in the testing phase since April. This currency aims to displace the current physical currency and become the first sovereign currency to reside exclusively in the ether. Confinement in the world's most populous country, with 1.4 billion people, set the perfect stage for Xi Jinping's bet on blockchain technology.

The use of cash in transactions fell below 5% in China, where the preference for payments made through apps has been clearly demonstrated. More than 80% of smartphone users in China make electronic payments via Alipay and WeChat, thereby displacing traditional banking. To restore this imbalance, the digital yuan will be offered to consumers through banks, allowing the government to regulate the market more effectively.

Outside of the People's Republic of China, the big question is whether the digital yuan will become a deadly competitor to the dollar. This cryptocurrency, which started very modestly, could pave the way for ambitious and lasting changes, above and beyond the current economic and health crises.

Checks were the key element in buying and selling transactions at the end of the last century; credit and debit cards have been the engine over the past decades; and now cryptocurrencies will become the norm in the markets. This is a good time to reflect: Is it time to move to wallet-to-wallet transactions, marking social distancing? What then will happen in countries dominated by cash, such as Mexico?

Originally published in Infobae.