A cryptocurrency comeback?

January 11, 2021

Cryptocurrencies are part of the digital ecosystem. They have rapidly matured in kind with the evolution of the digital world with increasing validity supported by the rising number of global constituents. Progress across regulatory agencies, increasing enterprise blockchain use cases, and a payment ecosystem helps address the banking needs of a blossoming younger generation.

Virtually all of these trends were accelerated by global digitalization efforts brought multiple years forward to help solve challenges created by the Covid-19 pandemic. In our view, these developments further validate blockchain as an integral component of future technological infrastructure.

Covid-19 forced tremendous change across the globe for both consumer and enterprise behaviors. Fortunately, a digital transformation was well underway prior to the pandemic, which helped solve many of the challenges. Remote work, distance learning, video conferencing, online shopping, and digital banking have become integral applications and services which help sustain a functional society. The resulting generational and societal transformations have extraordinary implications.

Monetary and economic systems are not immune to the changes we are experiencing in our own personal lives because of the pandemic. In our view, the current circumstances have increased the relative attractiveness of some blockchain technology, notably Bitcoin. Bitcoin’s utility as a currency has been openly scrutinized for a decade—with good reason in the absence of a digital society. A viable medium of exchange must be a store of value and must be stable and liquid. In other words, it must have low risk and low transaction costs. This has not historically been the case for Bitcoin. However, we believe that is changing.

Today, touchless payments, digital banking, and an entirely new generation of investors using applications to transact have emerged. Together these build a convincing case for evolving viability. Making matters even more interesting, we have seen central banking authorities print trillions of dollars and dollar equivalents since the outset of the pandemic resulting in an explosion in the global dollar money supply.

Erik A. Swords and Justin R. Sumner, senior research analysts, Mellon

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