Covid-19 has disrupted economies around the world and made cryptocurrencies more attractive. Recent studies have shown that digital coins, such as Bitcoin and Ethereum, offer important diversification benefits. Even in times of economic turmoil, they are beneficial to hold. Here is a look at the key benefits and challenges in the post-pandemic period.
According to a study conducted at the University of Bath, investors will benefit from diversifying their portfolios with cryptocurrencies. The researchers (Xinyu Huang, Weihao Han, David Newton, Emmanouil Platanakis, Dimitrios Stafylas, and Charles Sutcliffe) grouped popular coins into nine portfolios with equal weight. The segmentation was based on the blockchain algorithm type. 553 coins were evaluated in total, including minable ones like Bitcoin and Ethereum (proof-of-work) and more energy-efficient proof-of-stake coins.
Both PoW and PoS offered diversification benefits. This was true for seven of the nine portfolios. The researchers assessed the diversification potential of the coins before COVID-19 and in the post-pandemic period. The performance of the assets was compared to that of bond and equity portfolios.
The researchers concluded that most of the digital currencies benefited investors with diversified portfolios. Both periods showed similar dynamics as cryptocurrencies do not have the same exposure to variables like bonds, equities, and other asset classes. In the post-pandemic phase, most of the assets provided diversification benefits compared to normal economic conditions.
New investors are actively jumping into the market. In December 2020, the value of Bitcoin grew by over 40%. Institutional adoption has been a strong driver, as corporations like Microsoft, Starbucks, and AT&T now accept Bitcoin payments. Cash is being replaced with digital transactions.
This means that the value exchanged across the internet is no longer viewed as a fad. Part of the interest in crypto is also connected to the fear of missing out (FOMO). The future of cryptocurrencies presents unique advantages and challenges.
Cryptocurrencies democratize money and present fresh investment opportunities. The advent of central bank digital currency (CBDC) is expected to become a game-changer and spur rapid evolution of the banking ecosystem. It will provide consumers and businesses with a new way to store, accrue and exchange the value safely and at a low cost.
The transparency and visibility of crypto payments pose a potential privacy risk. According to Willamette University law professor Rohan Grey, the noble mission of helping people transact without bank accounts may result in the creation of a surveilled bank account system.
In terms of oversight, there are still plenty of unknowns. Connection to banks, user adoption, and digital coinage must all be streamlined before cryptocurrencies may be rolled out on a massive scale — for example, in a scenario like distribution of government-issued stimulus checks.