A Case of Corona
Corona is spreading and the markets are freaking out. What does it mean for bitcoin?
It’s fair to say that right now the world is losing its collective mind over COVID-19. Last week things escalated from “current affairs curiosity” to “wholesale meltdown” as the virus started cutting a swathe through continental Europe, Iran and South Korea, leading to travel bans, industrial shutdowns and a booming business in Facebook misinformation. Reality dropped on the global markets like an anvil in a Looney Tunes cartoon, causing hundreds of billions of dollars to evaporate almost overnight. Was this the beginning of financial armageddon?
The jury may still be out on that question, but something the current market chaos is offering is a fresh perspective on one of bitcoin’s most enduring debates: is it a store-of-value (AKA digital gold) or a high-risk, high-return proxy for the markets at large (AKA the shitcoin casino)?
At first glance, the past week would seem to be a fairly convincing rejection of the digital gold hypothesis. The stock market shat the bed and the crypto markets promptly followed. Meanwhile gold surged upwards, reaching prices not seen since the aftermath of the GFC. If gold functions as a safe haven asset in times of uncertainty, then a concomitant 15% plunge in the bitcoin price would suggest it was about as safe as BASE jumping into a volcano.
The bit picture
Yet perhaps it’s not as simple as all that. The bitcoin price dropped, sure, but it was due a correction after the ball-tearing gains of the first six weeks of 2020 and the heightened emotion of the last week provided the perfect excuse. Instead, bitcoin might best be considered an idiosyncratic asset, one that operates according to its own logic; while at times it might correlate with the market at large, at other times it doesn’t and the forces driving these moves are largely separate.
But what’s even more interesting to consider is how cryptocurrency fits into an interconnected global financial system whose fragility is very much being put on show right now. As the world’s governments once again attempt to shore up the damage through interest rate cuts and quantitative easing, bitcoin just posted its latest hashrate all-time-high. As an asset famed for its volatility, right now bitcoin is offering a strange sense of stability. This isn’t to say the price won’t dip further, or be its usual insane, unpredictable self, but rather to point out that, pandemic or no, GFC redux or no, bitcoin remains exactly the same beast it was when it was born on January 3, 2009, in the wake of the last worldwide financial meltdown. And maybe that counts for something.
For now though, just remember that a serious and unprecedented (at least in bitcoin’s lifetime) global event like COVID-19 can move the market in savage and unpredictable ways. So stay safe, in both trading and life. We’ve all gotta get to the Halvening together.
One more thing…
Sure, The Simpsons don’t have quite the cultural caché they did back in the 1990s, but when the latest episode (we’ve hit Season 31, in case you’re wondering) roped in Big Bang Theory star Jim Parsons to run a quick explainer on blockchain technology, it was hard not to feel like you were witnessing some kind of threshold moment. In an episode where Professor Frink invents a cryptocurrency named Frinkcoin and temporarily becomes the richest man in Springfield, here’s Parsons giving the lowdown on “the really cool subject of distributed consensus-based cryptocurrency.” Ka-chinga!
What’s the deal with Maker’s Dai? How exactly does a decentralised stablecoin hold its value?
I feared this day would come. The day that I had to try and explain how Maker’s Dai stablecoin works. Wish me luck.
Alright, the banner headline: Dai is a stablecoin whose value is entirely stored on the blockchain. Rather than being backed by a bank account stuffed with US currency (a la USDC), the Dai keeps its value stable by holding a basket of ERC-20 tokens that have been staked by their owners.
So, how does this actually work? The Dai is governed by MakerDAO, a decentralised autonomous organisation that uses Ethereum smart contracts to lock away ERC-20 tokens and replace them with an equivalent amount of Dai. This is known as your collateral debt position (CDP) – essentially you’re taking the Dai on loan and will, at some point, pay it back.
If the price of these tokens goes up the system becomes stronger – more value means more Dai can be created. However, if the price crashes, then CDPs will be liquidated as the system tries to keep the value stabilised. This means you keep your Dai, but lose your tokens.
There are a bunch of failsafes, governance mechanisms and benefits such as on-chain leverage and loans that you can get into if you really want to get hot under the collar. But for the moment all you need to know is that the Dai is an ingenious system that has kept its dollar pegging through civil wars and market collapses without ever sacrificing its decentralised origins.
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