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An antidote to costly cross-border payments

The idea of bitcoin becoming the world’s reserve currency is stoked by its recent run-up values. Can it bring economic order?

Bitcoin eagerly competes with other cryptocurrencies as the coin of the digital realm—but can we say that it is the future of conventional currency? “Bitcoin may be the most popular cryptocurrency, but it is by no means the only one,” says Marius Reitz, General Manager for Africa at Luno, a cryptocurrency platform that allows people to buy, sell, store and trade various kinds, in an interview with International Finance. Well, there are already more than 5,000 cryptocurrencies causing competition. “Many of them are offering unique characteristics that appeal to various needs,” Reitz says. “It is very likely that bitcoin will continue to be the most dominant for a while, mainly because of its properties as a store of value, its 12-year track record and the network effects it has shown.”

In 2009, bitcoin appeared on the scene, as the first type of cryptocurrency, enjoying an added-advantage of high media attention and investor trust. It has built a relatively larger ecosystem because of its wide acceptance among merchants and its convenience in use. Although some of the new altcoins are developed by virtue of introducing new ideas they are yet to flourish to a point of surpassing bitcoin by its value or adoption rate.

In vogue for all traders
By design, the bitcoin protocol fully relies on a resilient, peer-to-peer network referred to as nodes. One of the most vital responsibilities of a node is to verify a new transaction, validating it against a series of criteria. It is worth noting that even if one criterion is not fulfilled, the transaction will be rejected. Although resilient, the underlying software that holds bitcoin is open-source, which makes it possible to clone and create a new digital currency version of it. With advancing the evolution of cryptocurrencies ”there is certainly room for many of the existing and some new ones to play pivotal roles in the growth of the crypto industry,” Reitz explains. “As the market matures and viable use cases emerge, we envisage that more cryptocurrencies will become more prominent and individuals will be able to make informed decisions on which ones to explore and invest in.”

For now, bitcoin is still in the lead. Its market capitalisation hit $1 trillion as it climbed yet another record high in February, making a contrast statement to analysts’ warnings that it is an ‘economic side show’. “The last 12 months have been great,” Reitz says. Last December, it climbed to above $28,000 over a weekend, leading to promising talks about the exciting future of cryptocurrency. On top of that, Reitz makes a comparison in the surge of bitcoin that “this time last year, the price of bitcoin was under $9,000, but the economic uncertainty that has come with the pandemic has encouraged a wider group of people to explore cryptocurrencies, driving the price to over $40,000 in January 2021.” The surge in crypto values is not only seen in the case of bitcoin. “Even ethereum has performed well and the price broke the $1,500 barrier for the first time recently, but bitcoin is still the biggest crypto asset by market capitalisation,” Reitz added.

Another interesting fact about bitcoin’s run-up value is that even after a recent 15 percent drop, it still accounts for about 68 percent of the cryptocurrency market, which makes its market capitalisation greater than all other altcoins put together. In this way, it will continue to be in vogue for all traders. Bitcoin’s continuous rally might stoke one’s mind on whether its value trend has always been the case. In truth, bitcoin built back its reputational value when it captured the majority of the market within a year following its 32.8 percent market share in January 2018.

Bitcoin’s growing reputation as an asset class
The fintech community still questions the two forms of money: cryptocurrency and traditional bank deposit. Traditional finance officers consider the surge in bitcoin value as part of a larger speculative bubble, as reported. Some believe that the dramatic rise in its values is largely driven by retail investors. In January, the UK watchdog warned that investors ‘could lose all their money as the volatile price of bitcoin dropped from its all-time high record. Its starling 300 percent increase over the past year has received a lot of attention from market participants, but the 15 percent drop has forced them to revisit their investment decisions. The main worry is that amateur investors could be easily drawn toward bitcoin mania, without realising its potential to collapse in value, as it did in 2018. The Financial Conduct Authority has emphasised that cryptocurrencies like bitcoin are largely unregulated, and investors would only have a slim chance to request compensation or raise complaints in the event of a mishap.

“Our advice to anyone interested in cryptocurrencies is to avoid jumping on bandwagons without taking their time to investigate the assets they would like to invest in and getting advice from reliable sources. Also, don’t place all your money in a single investment and don’t invest more than you can afford to lose,” Reitz says. “There are many cryptocurrencies with many different appeals. As a result, there is no one way of measuring what ‘best performing’ actually means. Bitcoin may be the most valuable crypto asset at the moment but other assets have grown in popularity for a variety of reasons.” He states an example of Dogecoin’ price that went up by over 800 percent in January 2021, as a result of attention from Reddit users, particularly encouraged by the actions of Elon Musk. “Globally, 2020 was a record year for institutional investment in cryptocurrencies, with MicroStrategy, Mode, Square and others moving huge percentages of their cash reserves into bitcoin in a bid to hedge their investments,” Reitz says.

According to Musk, bitcoin is ‘on the verge’ of being more commonly accepted among investors. Certainly, that’s one way to look at this. If cryptocurrency is being treated like gold and accounts for half of a percent of many balance sheets, it would still point to a high price for all major cryptocurrency assets. Tesla has bought $1.5 billion worth of bitcoin. In a filing, the company said that the reason for buying bitcoin was for “more flexibility to further diversify and maximise returns on our cash.” Tesla has also said that it will start accepting bitcoin as payments in exchange for products, initially on a limited basis and subject to applicable laws. With that, the company could become the first major automaker to take such a big step, and the $1.5 billion worth of purchased bitcoin will give the company liquidity in bitcoin once its new payment option becomes available.

Even PayPal has opened doors to bitcoin by allowing its 346 million users to buy and spend various types of cryptocurrencies. The company wrote on its website “We announced that PayPal users in the US can buy, sell and hold select cryptocurrencies directly through PayPal using their Cash or Cash Plus account. Users will be able to learn about crypto, track crypto prices, all without leaving the PayPal app. We plan to introduce this service to Venmo in 2021. PayPal also announced that it will enable cryptocurrency as a funding source for purchases in 2021, allowing users to use their cryptocurrency holdings to make purchases at its network of more than 26 million merchants. Once launched in 2021, when a consumer selects cryptocurrency as the funding source, the cryptocurrency will be instantly converted to fiat currency and the transaction will be settled with the PayPal merchants in fiat currency.”

The world’s largest asset manager BlackRock has also started exploring the bitcoin side of things. Rick Rider, who is BlackRock’s chief investment officer of fixed income, told the media that ‘people are looking for storehouses of value’, despite bitcoin’s volatility being extraordinary. In fact, in January, the asset manager had added bitcoin futures as an investment for two of its funds, the BlackRock Strategic Income Opportunities and the BlackRock Global Allocation Fund. Other financial institutions such as BNY Mellon, which is New York’s oldest bank, and Mastercard are preparing to test the waters. It is reported that BNY Mellon is planning to launch a digital assets unit later this year, while Mastercard aims to support certain cryptocurrencies on its formal network.

“We are holding a lot more cash than we’ve held historically,” Rider told the media. “It is because duration doesn’t work, interest rates don’t work as a hedge and so diversifying into other assets makes some sense. Holding some portion of what you hold in cash in things like crypto seems to make some sense to me, but I wouldn’t espouse a certain allocation or target holding.”

Vying with gold
In some capacity, bitcoin is already competing with gold, which is accepted as a safe haven on a global scale. Reider believes that bitcoin could take the place of gold ‘to a large extent’ and cryptocurrency is here to stay. There is a lot of receptivity between millennials and technology, especially if it is new and exciting. For years investors have been turning to gold, especially during times of stifling financial or market conditions. Bitcoin is slowly building on the same reputation as a ‘form of digital gold’, according to a global market strategist at JP Morgan. However, bitcoin still has a long way to go because the value of gold in the private sector is around $2.7 trillion, and it would take an inexplicable amount of time for bitcoin’s market capitalisation to reach that level, with a price of around $146,000. In January, the gold prices fell 3 percent, while bitcoin rallied. The price of gold rose from $1,100 to $1,900 during the period between 2019 and 2020.

Gold’s market capitalisation stands anywhere between $9 trillion and $10 trillion. Even if bitcoin captures half of gold’s market capitalisation there will be a growth of four times or $200,000. Still, the biggest caveat is the volatility around bitcoin’s price. It is observed that its price volatility is five times higher than gold. “Cryptocurrencies are still relatively new, so there will always be a higher level of volatility compared with other more established asset classes. We must remember that as the benefits become more evident, more people will hold these cryptocurrencies for their utility and this will make the market less volatile,” Reitz says.

New global reserve currency of the future?
The new celebration around bitcoin is gaining momentum. There is enough anticipation that bitcoin could climb to $1 million in five years to become a global reserve currency for two reasons. First: Scarcity of cryptocurrency with a market capitalisation of 2.1 million coins. Second: The decentralised nature of the technology. Currently, the bitcoin network is made up of miners who are responsible for processing transactions and operate specialised computers that use powerful machines. There can be no single entity to control the network because there are so many miners who are solving the puzzle independently, at the same time. Bitcoin proponents claim that the network is one of the strongest computer networks globally, making a statement that it is so much more resilient. The blockchain serves as a ledger in the bitcoin protocol, with a record of every transaction ever made.

The intriguing thought behind its potential to become a reserve currency of the world is that with an increasing number of people coming into the market, there is more liquidity, meaning that there is more utility and as a result, more stability in price, thus creating an evolution. That said, another important requirement of a reserve currency is that it must function as a store of value. In the case of bitcoin, it would need to hold a value over the long-term, and although market observers believe that it is possible, the vote is not unanimous. It seems that bitcoin has the potential to capture interest around the world—and in truth it does. It can be a great store of value in those countries that suffer from geopolitical turmoil, as they can witness their national currencies go through substantive changes in value quickly,

The internet economy is a vast space with no native currency. So it certainly creates a huge opportunity for bitcoin to transform itself as the ‘global reserve currency of the internet generation’. However, there is one highly debatable aspect. For bitcoin to become a global reserve currency it will have to replace the US dollar by functioning as a unit of account—and the extent to which it can serve this purpose is open to discussion. Today, most central banks are researching digital currencies to create their own. According to the Bank of International Settlements, Sweden’s imminent work in becoming a cashless economy is moving in the direction of developing central bank digital currencies, which surpasses its aim to change the international monetary system. However, many economists believe that the fixed supply of bitcoin would not be an impractical attempt at making it a global reserve currency, as demand would outstrip the supply, resulting in a permanent deflation if adopted.

“With the uncertainty caused by the pandemic, an entirely new audience is looking at cryptocurrency, as a whole, for the first time. They are beginning to think beyond the tried and tested way of managing money, and exploring new ways to get the most out of their money,” Reitz says. “If the last few months have taught us anything, it should be that the future can be difficult to predict. However, we envisage now that people are beginning to see the untapped potential of cryptocurrency and more use cases are beginning to emerge, we will see a continuation of the ongoing trend of increased interest in cryptocurrencies.”

Notable crypto revolution in Africa
Africa is experiencing a quiet cryptocurrency revolution as the continent continues to embrace mobile money, for its tech-savvy population. The cryptocurrency transactions every month to and from Africa which was below $10,000 has increased by 55 percent over the past year, according to data from US Blockchain research firm Chainalysis. A fascinating thing about Africa’s exposure to cryptocurrency is that it is mainly used for commerce, unlike the rest of the world. Small businesses in Nigeria, Kenya and South Africa are mostly following this trend.

According to the latest Google Trends data, Ghana, Nigeria and South Africa rank in the top 10 countries for the highest Google search of the word bitcoin. Reitz points out that, a recent survey from Luno, which featured 15,000 participants from France, Italy, the UK, Nigeria, South Africa, Indonesia and Malaysia found that 54 percent of Africans are ready to adopt a global digital currency. These figures show that Africa has the largest appetite for digital currency adoption with Asia at 41 percent and Europe at 35 percent ranking second and third respectively.

“In Nigeria, we grew by more than 2 million users in 2020 alone and our transaction volume more than doubled during this period. We also had thousands of new users from South Africa, Zambia and Uganda, resulting in a 100 percent increase in trading volumes during this time. Globally, we now have more than 6 million users and more than 75 percent of those are based in Africa,” he said. In many African countries, where money is often more than just a ‘nice to have’ and is vital for securing what you want from life, people spend more time understanding it, managing it, preserving it and being creative with how you maximise the use of it. For many Africans, if cryptocurrencies can provide a secure, legal and cheaper means of exchanging value than the existing system, it will be used; or at least explored.

“Cryptocurrencies also offer an ideal antidote to costly cross-border payments which are necessary for facilitating intra-continental trade. Stablecoins like USDC for example, which we recently launched on our platform, can mitigate the impact of currency volatility, and deliver a greater level of stability for individuals and businesses than local currencies,” Reitz says. “However, the numbers in Africa are still small. The presence of institutional investors in Africa’s cryptocurrency market will help the industry to mature and become more efficient, and we envisage more institutional investment in Africa over the next five years. However, there needs to be a better understanding of crypto’s use cases and regulation to attract this level of investors,” Reitz added.

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