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David Azzato On What the Pandemic Has Done to Cryptocurrency Markets: The Lesson of Digital Assets

london based crypto advisor david azzato sits in front of a new york city backdrop

Cryptocurrency values go up and down, but since the beginning of the pandemic the trend of cryptocurrencies, especially Bitcoin, has been decidedly upward.

In a single 24-hour period in August, the value of Bitcoin went up 3 percent. From March 2020 until 5 November 2020 as this article is being written, the value of a bitcoin has climbed from a little over $5000 to a little under $15,000.

While skeptics are never quite sure whether cryptocurrency is here to stay, the popularity of crypto is increasing not just in the United States but around the world. Investment maven David Azzato explains this phenomenon as resulting from investors turning to digital solutions when physical businesses are shut down.

David Azzato on the Long and Short of Cryptocurrency

To Azzato, the psychology of the surging cryptocurrency market is simple: When people have to work online, they tend to put their investments online. Azzato predicted dips in the market to coincide with surges in the pandemic, and the data proved him right, but he also predicted the market would rebound just as quickly — and the data prove he was right about that, too. Throughout 2020, every time Bitcoin has dipped in price, it has recovered and reached a new peak in two months or less. The power of the blockchain is emerging in the pandemic.

There is an ongoing controversy, which Mr. Azzato believes is not likely to be resolved soon, over what cryptocurrency can do. Observers are rationally concerned about the anonymity of cryptocurrency, never mind that cash is also anonymous. Some observers associate cryptocurrency with criminal activity.

But no matter how many bad things are said about cryptocurrency, you won’t hear a lot of complaints about blockchain. The underlying technology that makes cryptocurrency possible, this nearly unhackable ledger is hailed as a miracle that keeps cryptocurrency investments safe.

(Blockchain isn’t absolutely unhackable.MIT Technology Review reports that since 2017, techno thieves around the world have stolen around $2 billion for cryptocurrency exchanges, mostly in lesser-known and lightly traded cryptocurrencies. The website Crypto51 estimates that rounding up the computational heft to attempt to hack Bitcoin would cost $709,000 an hour. up from $260,000 an hour before Bitcoin exchange security was upgraded earlier this year.)

Blockchain is sufficiently secure that big-name institutions like the Intercontinental Exchange, owner of the New York Stock Exchange, and Fidelity Investments have started to mix blockchain in the existing financial system. Blockchain has caught the attention of some central banks, and it’s not because they are hoping that cryptocurrency will replace fiat currency already in circulation. 

The economic power of blockchain has only become more obvious since the beginning of the pandemic. COVID-19 is disrupting economies all over the world, but cryptocurrency supplies confidence that investing in currency mining and exchange will be profitable. 

Companies that are invested in cryptocurrency mining and exchange are hiring, not firing. They aren’t giving up office space, they are finding new ways to accommodate and supervise their new workers at a distance. And most cryptocurrency firms are applying for appropriate state licenses (which just got a lot easier to get) to make sure everything is done on the up and up.

The Pandemic Is Proving That The Cryptocurrency Industry Has Strong Bones

The current boom in cryptocurrencies does not mean that every one of the over 1,500 cryptocurrencies traded is doing well, but there is no doubt that the industry has strong fundamentals.

When stocks and bonds are seen as tenuous and cryptocurrencies are seen earning enormous returns, there is going to be a major shift in the way things are done. That just doesn’t mean that traditional equities are going away soon. It means that investors are finally open to investments made in a virtual world rather than in a physical world.

The reordering of our economy will only accelerate with each wave of the virus. Companies that barely hung on during the last wave of the epidemic will go under during the next. All over the world, businesses of all sizes are in sink-or-swim mode.

This principle also applies to cryptocurrencies. Nouriel Roubini, the New York-based economist, and professor at the NYU Stern School of Business,.and the famed “Dr. Doom” who predicted the 2008 recession, opines that up to 99% of the world’s hundreds of cryptocurrencies will eventually go belly up, and even cryptos protected by the best blockchain security like Bitcoin can be seriously volatile.

Even in 2020, the exchanges for Bitcoin are not large enough for an investor to liquidate even $10 million without severely moving the market, according to experts. Most exchanges have much lower limits on liquidations every 24 hours than the SEC ever imposes on stock markets. But the relative volatility of cryptocurrency is much lower for investors in high-inflation countries, such as Argentina, and the decision of the IRS in the USA to treat cryptocurrency as an asset, subject to capital gains and losses, also reduces the impact of volatility on investors.

Changes in US tax laws make bitcoin a more stable investment. If you lose on bitcoin, you can at least offset gains when you sell other assets. But is stability really what consumers are looking for? David Azzato says understanding consumer demand is the crux of the problem.

What Do Consumers Of Investments Want?

The pandemic has proven predictably unpredictable, David Azzato tells us. The stochastic realities of the pandemic force investors to focus on the critical question of what consumers want.

Investors in cryptocurrencies, and investors who are considering adding cryptocurrencies to their portfolios, need to know who is using cryptocurrencies and why they are using them. Storage companies need to understand the obstacles to the broader use of cryptocurrencies. And, David points out, cryptocurrency miners need a full understanding of how they can attract new clients from the financial services sector and beyond, whether they use cryptocurrencies or not.

There is enough interest in derivatives that there is even a service tracking them, and a chat room following cryptocurrency futures.

David believes that investors derive value as the market educates the public about the inherent value of the coins, much as people understand the inherent value of gold. The arrival of the pandemic struck fear in the hearts of crypto investors, but because shrewd investors understand the fundamental value of cryptocurrencies, it rebounds just a couple of months later.

Investors see rebounds with Bitcoin over and over. There is volatility with other widely-held cryptocurrencies, such as Ethereum, but no cryptocurrency affords more opportunities for derivatives makers than Bitcoin.

Just how many opportunities for investors in derivatives are there with Bitcoin?

  • According to a survey by Big Four audit firm PricewaterhouseCoopers and Elwood Asset Management Services, there are no fewer than 150 derivatives funds focused on cryptocurrencies, most of them founded in 2018 or 2019.
  • Systematic cryptocurrency investing yields greater returns than a long-only strategy.
  • A typical “whatever I feel like” approach to investing (that might be termed a “multi-strategy” approach to investing) in cryptocurrencies yielded a median return of 15% in 2019. But a disciplined, quantitative approach to investing in cryptocurrency in 2019 yielded an average rate of return of 58%.

Investors who follow market fundamentals can go long or short and make money whether the value of a cryptocurrency goes up or down. But most investors in cryptocurrency limit themselves to Bitcoin, Azzato says, and invest casually.

What Motivates Casual Investors In Cryptocurrencies?

Cryptocurrencies follow a much more volatile trajectory than traditional investments, David Azzato advises, but the same motivations apply to both investments in cryptocurrencies and traditional equity investments. 

People don’t invest in cryptocurrencies because they see them as a global solution to a global problem. They may make small investments in cryptocurrencies out of curiosity. Or they may buy Bitcoin as a curiosity. Or they may want to make a tiny commitment to the market just to learn how it works.

A few investors believe in the potential of cryptocurrencies to bring stability to our equity markets. Stamping out fraud — at which at least Bitcoin has been largely successful — and creating a universal currency everyone knows and understands will streamline financial transactions in ways we are just beginning to imagine.

But volatility in the cryptocurrencies markets from their inception to the present has only been to be expected. When investors see chaos, as they did in the early months of the pandemic, the markets respond with chaos. Companies plunge and surge again in response to investor expectations. That is the reason the pandemic has had an even greater effect on cryptocurrencies than on stocks.

What Is The Fundamental Appeal Of Cryptocurrencies?

David Azzato ascribes the allure of virtual trading as part of the appeal of cryptocurrencies. After all, commodities, stocks, and bonds weren’t being traded primarily on the floors of the exchanges even before the pandemic hit. Even before the pandemic, even institutional investors were far more likely to do business over the phone than on Wall Street.

There are a plethora of mobile applications for trading cryptocurrencies. The speed and flexibility of mobile apps are especially appealing when the market goes up and down in violent swings. And if we take time to contrast and compare, we can see the benefits of cryptocurrencies even more clearly.

Entrepreneur and Crypto expert David Azzato points out that investors tend to treat certain kinds of assets, such as real estate, cash, and precious metals as if they had fixed, predictable value. The truth is, as Mr. Azzato says, that inflation can change the value of even these assets overnight. Just because $10,000 buys you something today, you aren’t guaranteed you can also buy that thing with $10,000 tomorrow.

Real property only retains its value as long as it retains its utility. If rising sea levels turn your seaside estate into an aquarium, your property values will go down. 

Precious metals only retain their value as long as they physically exist somewhere. The value of your hoard of Krugerrand in your wall safe can go to zero if your home is burgled.

Despite the fact that cryptocurrencies are only in their second decade of existence, they have the potential to change the old paradigm. No storm or cat burglar or pandemic can take your cryptocurrencies away from you. Their existence is constant and the long-term trend in their value is up.

Improvements In Communications Technology Are Also Driving The Cryptocurrencies Market

Every new mobile device does more than the last. The cost of the latest Android or iPhone is a trivial expense for serious investors. The pandemic is forcing investors and everyone else to rely on their mobile devices, and the increasing usefulness and cost-effectiveness of those devices are driving money-conscious people all over the world to invest their capital to take advantage of easier communication. Cryptocurrency investments are a natural target for connected investors.

As more people see that the long-term trend of cryptocurrencies is increasing value, more people will invest them. And as more people invest in cryptocurrencies, more retailers and vendors will accept them as payment. And as more retailers take cryptocurrencies, legislators will be forced to treat cryptocurrencies as legitimate.

David Azzato Sees The Emergence Of A New Marketplace

So, what kinds of trends will we see in the market for cryptocurrencies?

David Azzato believes that small investors will act more aggressively in responses to the headlines about the cryptocurrencies markets. As we noted above, large investors can’t yet make eight-figure or higher transactions in cryptocurrencies without detrimentally moving their markets, but smaller investors will act on good and bad news about cryptocurrencies quickly.

David believes that the expansion of the acceptance of cryptocurrencies will result in bigger IPOs for cryptocurrency service companies and more incubators for consumer products. As more and more ordinary consumers add cryptocurrencies to their digital wallets, and blockchain becomes even more functional, there will be tremendous growth in supporting industries.

And as the cryptocurrency industry continues expanding, we will see more and more participation by institutional investors. New survey data show that institutional investors intend to buy every dip in Bitcoin. Respondents to a study sponsored by crypto-asset insurerEvertas found that:

  • 13 out of 50 institutional investors in the US and the UK managing funds with assets of $1 billion or more believe that pension funds, insurers, family offices, and sovereign wealth funds will raise their stakes in cryptocurrency “drastically”.
  • 16 out of 50 institutional investors in the survey report that they believe that hedge funds will increase their holdings in cryptocurrencies and cryptocurrency derivatives substantially in 2021.
  • 30 out of the 50 institutional investors surveyed include Bitcoin in their portfolios.
  • 40 out of the 50 institutional investors surveyed believe cryptocurrencies are an attractive asset.

The results of a new survey by brokerage firm Fidelity found that professional investors favor investments in cryptocurrencies because they believe that these investments are not tied to the results of the stock market. The Fidelity survey also found that professional investors were attracted to the disruptive nature of cryptocurrency technology, and, of course, the potential for large profits.

David Azzato Says Not To Forget That Blockchain Doesn’t Just Apply To Cryptocurrencies

David Azzato also points out that blockchain is sufficiently versatile that it applies to nearly every industry. Blockchain can facilitate easy updates of electronic health records. it can help NGOs introduce accountability into their grants and charitable distributions. It can track goods and services from vendors to customers.

Blockchain also has implications for the Internet of Things (IoT), Mr. Azzato says. It has applications to everything from controlling your home heating system when you are away on vacation to managing security systems at schools, hospitals, and government offices.

As the IoT has more and more applications, there will be more and more opportunities to incorporate blockchain technology. Even if some companies and technology vendors resist the use of blockchain, the tremendous increase in its popularity will drive untold innovation.

The proverbial fly in the ointment with the growth of blockchain is the necessity of regulation. The early appeal of cryptocurrencies was avoiding government regulation. Modern blockchain technology accomplishes that, but investors seek security, not just opportunity for fabulous gains. And for cryptocurrencies and blockchain technologies to become universally popular, everyday consumers must know what they can expect. That isn’t possible without some degree of regulation.

Blockchain Can Make The World Go Round

With necessary rules to encourage consumer acceptance, blockchain and cryptocurrencies will change the world as we know. Workers sending remittances home to their families won’t have to spend shocking high percentages of their incomes on transfer fees and losses on currency exchange. You won’t have to pay $1.00 for a pack of gum because the merchant spends $0.40 on credit card processing fees. Cryptocurrencies will connect people around the world in ways traditional money never will.

The events of 2020 lead careful observers to an inevitable conclusion: The world will never go back to what it used to be. But even if the pandemic forces us to overhaul our financial systems, blockchain gives us a democratizing way forward that will only drive the prices of cryptocurrencies up.