September 19, 2020

Coronavirus Is Shaping Up To Be Very Bad For Banks—But Not For Bitcoin


The coronavirus pandemic has turned the established status quo on its head with many businesses and industries still reeling.

The world’s biggest banks have seen their valuations plummet, with billionaire investor Warren Buffett bailing out of long-held bank stocks this year—and joining many other investors in betting on gold (though the Oracle of Omaha is still not keen on bitcoin).

Billionaire Warren Buffett, the legendary investor[-]
known as the Oracle of Omaha, has previously invested in game-changing technology but isn’t interested in bitcoin or cryptocurrencies. DANIEL ZUCHNIK

As banks struggle in the post-Covid world, bitcoin and cryptocurrencies are expected to see a “pandemic-led acceleration of adoption,” according to DBS chief economist Taimur Baig.

“Pre-pandemic demand was largely speculative,” Baig told bitcoin and cryptocurrency news website Coindesk. “People saw bitcoin had a spectacular run and wanted to be part of that game, so what’s wrong with putting in 1% of assets under management [into bitcoin]. But I think post-pandemic is beyond speculative. It’s more about, ‘This thing has fixed circulation, it will not be debased.’ People are worried about dollar outflow and wondering if they should hold crypto in addition to gold as a safe-haven currency.”

George Ball, a former Prudential chief executive
and self-confessed bitcoin skeptic, has said he expects investors will turn to bitcoin as both a safe-haven and short-term speculative bet.

This year, a number of high-profile, established investors, led by the famed Paul Tudor Jones in May, have espoused bitcoin, with its fixed limit of 21 million tokens, as a potential hedge against the inflation they see coming as a result of unprecedented coronavirus-induced stimulus measures.

Baig’s comments follow a report he wrote for the Singapore banking giant last month that found 2020 is “shaping up to be a landmark in the history of digital finance,” and cryptocurrency is here to stay.

“There is no point of no return for public and private digital currencies,” Baig wrote, along with a number of his DBS colleagues. “Both remain brave new frontiers, with new use cases, technological developments, and challenges appearing regularly.”

Meanwhile, banking stocks have struggled to bounce back from the March coronavirus-induced crash, in part due to the massive central bank stimulus measures put in place to offset the damage wrought by the coronavirus pandemic. The measures include central banks around the world, led by the U.S. Federal Reserve, slashing interest rates and revving up their money printers through quantitative easing.

“Low base rates drag down the interest rates that banks can charge on loans and quantitative easing is designed to flatten out borrowing costs too, with the result that credit spreads—the premium in interest rate that a company has to pay relative to a government—are also relatively low,” Russ Mould, investment director at brokerage AJ Bell, said via email, adding “central bank policies may be, unwittingly, doing more harm than good when it comes to the major lenders,” and “seriously undermining banks’ profitability and their ability to earn decent returns on equity.”

Bank stocks have taken a big hit in 2020—the KBW Nasdaq Bank Index has dropped 33% this year—with loose central bank policy adding to investor concerns over the tens of billions of dollars major lenders have set aside to account for potential loan losses.

“Only U.S. banking stocks have shown any real signs of life in the past few years, but the pandemic, a recession and reversal of Fed policy from tightening to easing (and running policy loose until at least 2023) has taken care of that in 2020,” Mould said.

Bitcoin trading volumes have soared this week as
the bitcoin price rocketed higher.

In contrast, lockdowns, money-printing and stimulus measures have pushed many toward bitcoin and cryptocurrency. Bitcoin and cryptocurrency exchanges around the world have reported sky-high trading volumes and surges of new users over recent months.

Rep. Tom Emmer, R-Minn., is a long-time advocate
of bitcoin, cryptocurrencies and blockchain and thinks bitcoin will be strengthened once the world emerges from the economic chaos caused by the coronavirus pandemic.

Meanwhile, others have previously said they expect the coronavirus pandemic to boost bitcoin. In August, U.S. Congressman Tom Emmer said he expects bitcoin to “get stronger” as the world emerges from the coronavirus crisis.

“As we come out of the crisis, bitcoin isn’t going away,” Emmer (R-MN) told bitcoin and crypto investor Anthony Pompliano, speaking during an interview on Pompliano’s popular podcast, adding bitcoin and cryptocurrencies are going to “continue to become more and more important,” due to its decentralized nature.

By Billy Bambrough

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