Bitcoin & co soar as Covid ‘safe havens’

● A cryptocurrency mania known as decentralised finance has helped to turn digital currencies into this year’s best-performing asset by far.

The Bloomberg Galaxy Crypto Index of digital coins is up about 66% in 2020, exceeding gold’s jump as well as returns from global stocks, bonds and commodities. A key reason is a surge in ethereum, which accounts for more than a third of the crypto gauge’s weight.

Increased adoption of decentralised finance, or DeFi, has driven the climb in ethereum, which “appears to be maintaining its platform leadership status”, said Mike McGlone, a strategist at Bloomberg Intelligence.

DeFi ports financial functions onto digital ledgers called blockchains, allowing people to lend or borrow funds and earn interest in a savings-like account without the need for intermediaries such as banks. Its growing popularity is part of a wider trend of increased blockchain usage.

DeFi collateral levels have reached $9bn (about R150bn) from less than $700m at the start of the year, according to Fasset, which operates a blockchain-based marketplace for infrastructure investment.

Proponents of digital currencies such as bitcoin argue they offer a store of value amid concern that huge stimulus injections to counter Covid’s economic impact will stoke inflation and weaken the dollar.

Crypto markets have done well during the Covid-19 crisis partly because bitcoin becomes a “refuge,” like gold, when risks multiply, according to Marc Fleury, CEO of crypto asset management and financial technology firm Two Prime. “A purely ethereal instrument performs well when the real economy is on pause.”

Sceptics are unconvinced, arguing crypto markets have a history of wild swings and are merely riding a tide of liquidity. Cracks are also appearing in the hype around DeFi.

Overall, investor interest in cryptocurrencies is broadening as derivatives markets for bitcoin and ethereum expand.

DeFi led to a surge of interest in ethereum contracts, said Aziz Zainuddin, chief product officer of Fasset. “Retail cryptocurrency users have increasingly turned to derivatives to maximise their returns.”—