News & Events

World news - 06/02/2021

Bitcoin – Volatility Equals Opportunity

Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on the Malta Chamber 6th February 2021

The COVID-19 pandemic has led to a substantial surge of business closures. Many have felt the dire repercussions of various lockdowns and lack of customers due to the closing of businesses as a precautionary measure to limit the influx of COVID-19 cases.

The same cannot be said about bitcoin. The cryptocurrency saw a remarkable rise since the start of the pandemic.

In January 2020, bitcoin was trading at $7,000 (€5,847) but skyrocketed to $19,028 (€15,893) in November almost reaching an all-time high. A sharp increase was noted between the months of September and November as its value increased by almost $9,000 (€7,517) before settling to $17,000 (€14,200) at the end of November.

This did not slow bitcoin’s impressive run as the month of January saw bitcoin go as high as $35,000 (€29,235), reaching its all-time high notwithstanding the cumbersome times we are experiencing. Some experts on the field have predicted that by mid-February, bitcoin will reach $50,000 (€41,764) before gradually declining to a plateau level.

Initially, this significant surge may seem strange, however, due to the complications caused by the pandemic, people had to look at other sources to generate some sort of income. Many lost their jobs leading to an increase in cryptocurrency trading as a countermeasure to losing their primary source of income. In addition to this, new job opportunities materialized from crypto-investing. Professions such as technical analysts and crypto influencers emerged throughout the past year and many have guided friends and family members in crypto-trading.

Apart from this select group of people, retail investors have also joined the bandwagon after a continuous increase in the value of bitcoin. Investors looked for other opportunities after observing how unstable the stock market has been during the pandemic. Investors are aware of the fact that the value of their stocks depends on the success of companies which have been put into an uncomfortable situation in the course of 2020. People with money invested in the stock market moved their funds from the stock market to bitcoin in an attempt to shelter the value of their investments.

Moreover, given its limited supply, many view bitcoin as a store of value, hence, offering an attractive alternative to conventional deflationary assets like gold.  This surge in the value of bitcoin is not the only news coming from the cryptocurrency world as more and more sources are claiming that China intends to launch its much anticipated digital currency in February of 2022, just in time for the 2022 Beijing Winter Olympics. This Central Bank Digital Currency (CBDC) involves the utilization of blockchain technology as a means to signify a country’s official currency.

What makes a CBDC different from other regular cryptocurrencies is the fact that the former is regulated by a central bank. This CBDC, being referred to as digital yuan is being strongly backed by the People’s Bank of China as the latter entity is seeking to build an infrastructure for mass digital yuan use and perhaps as a means of mass cross-border transactions in the future. This would undoubtedly give the Dollar a run for its money as the go-to currency for international transactions. This stems from the fact that currently, over 60 per cent of known central bank foreign exchanges reserves are in US dollars, making it the de facto global currency.

Given the fact that this cryptocurrency is created, signed and issued by the People’s Bank of China, this CBDC unlike other cryptocurrencies is stable as much as the physical yuan. Thus, it has the same benefit as the physical yuan for being stable, however, each piece of digital yuan can be tracked by China’s central bank, unlike conventional currencies. The process of withdrawing funds would be similar to that of an ATM; customers would download the currency from their bank accounts into digital wallets or apps. China already widely uses similar 3rd party applications such as WeChat and Alipay as a means to purchase goods or pay friends thereby making the transition to the digital yuan less onerous.

It was mentioned above how the digital yuan is trackable thereby offering something new when compared to the conventional physical yuan, nonetheless, this might deter other countries as well as Chinese citizens from making use of it as having one’s every transaction being tracked may be discouraging even if such transactions are completely legitimate and legal.

Hypothetically speaking, this feature would allow the People’s Bank of China to learn about other countries spending habit as it would allow China’s Central Bank to know where other countries are spending their money as well as on what they are spending it. this has raised some concerns vis-à-vis security, nonetheless, no one is saying that China will indeed track how the digital yuan is being spent, however, it remains a possibility worth mentioning.

PKF Malta prides itself in providing a one-stop-shop service in relation to blockchain and crypto sectors such as the provision of crypto AML reporting and compliance through the use of outsourced partners, introduction to DLT friendly local banks and international banks, financial institutions offering account opening and payment solutions.

 

Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on the Malta Chamber 6th February 2021
Get in touch: info@pkfmalta.com