COVID – Killing Banks, Boosting Bitcoin

The coronavirus pandemic has turned the established norm on its head with many businesses and industries still bleeding.

As banks struggle in the post-COVID world, bitcoin and cryptocurrencies have seen a pandemic-led acceleration of adoption, which experts expect to snowball in size as we continue through the current state of the economy. 

Even here in Australia, where we are doing well in comparison to other countries, major banks are facing their biggest test since the 2008 financial crisis. Many of the big 4 banks are preparing for a wave of loan defaults as government supplements are slowed down and loan “holidays” are foregone at the end of this month. The Australian banking industries bad debts are expected to peak mid-2021 as a result.

Pre-pandemic demand for bitcoin was largely speculative. People saw bitcoin had a spectacular run and wanted to be part of that game, so they put in 1% of assets under management into bitcoin as a punt. But post-pandemic buying pressure 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 and silver as a safe-haven currency.

This year, several high-profile established investors, led by the famed Paul Tudor Jones in May, have taken bitcoin on board, buying up $20 million in tokens as a play against potential inflation. They see inflation coming as a result of unprecedented coronavirus-induced stimulus measures.

Meanwhile, banking stocks globally 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. Quantitative easing is designed to flatten out borrowing costs too, with the result that credit spreads (the premium in the interest rate that a company has to pay relative to a government) are also relatively low. 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 with the KBW Nasdaq Bank Index having dropped 33% this year. Loose central bank policy is additionally 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.

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.

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 stated, adding bitcoin and cryptocurrencies are going to "continue to become more and more important," due to its decentralised nature.