Bitcoin and other crypto assets are widely renowned for their volatility. Investors have always been very cautious when venturing in the crypto market with the virtual currencies considered as highly risky assets.
However, the crypto community has maintained a different view claiming that Bitcoin is sound money that can serve as a medium of exchange and a store of value. There haven’t been much argument about bitcoin's functionality as a medium of exchange. The currency is used for peer to peer transactions and is increasingly being adopted by merchants, albeit selectively.
Bitcoin as a store of value divides opinion
The biggest cause of disagreement is the use of Bitcoin as a store of value. The crypto community has always championed virtual currencies as the future of money with bitcoin viewed as digital gold. Some within the space have even suggested that Bitcoin and crypto assets in general are ideal safe-haven assets.
The commonly used argument to support this argument is that the crypto market has always been resilient in the midst of market turmoil. The digital assets have retained their value through crashes, economic downturns, and other external factors that have devastated conventional financial markets.
This argument has stood for a long while as cryptocurrencies continued to defy the behaviour of other financial instruments in response to the economic conditions. With the occurrence repeating multiple times, the notion that cryptocurrencies were uncorrelated to the financial markets gained momentum. It seemed that in some way, virtual assets could after all be a safe haven that investors could rely on to retain their wealth irrespective of the economic conditions or market sentiment.
Black Swan event knocks Bitcoin of its pedestal
Bitcoin’s capabilities as a safe haven asset were put to question this week as markets were confronted by the full force of the coronavirus epidemic.
Bitcoin failed terribly. A $50 billion failure.
This week, markets opened to WHO declaring the coronavirus a global epidemic, an oil price war and economic slowdown. Each of these issues is disastrous enough on its own. Combined together, they are catastrophic, and evidently so.
On Monday, both the Dow Jones and S&P 500 market indices recorded their poorest performance since the 2008 financial crisis. While their decline continued in the following two days bitcoin and the crypto market remained resilient, only incurring minimal losses, by industry’s standards.
At the time, the cryptocurrencies behaved as a safe-haven asset would. Uncorrelated to the market and retaining its value in the middle of a market crisis. Consequently, the crypto market outperformed other assets like gold and securities between March 9 to 11.
Bitcoin bows under pressure
However, the digital assets capitulated on March 12 following Trump’s ban on European flights to the US. The resulting fear and panic triggered a massive sell-off that even the crypto market couldn’t handle. Most of the top 10 cryptocurrencies lost over 30% of their value within the day.
Bitcoin alone, dropped over 20% in a single day and about 50% of its value in just 2 days.
At the height of the sell-off, some cryptocurrencies recorded double digit losses within one hour. The top three cryptocurrencies Bitcoin, Ethereum, and XRP lost approximately 19%, 25% and 18% of their value in a few minutes.
While conducting a post-mortem of this week’s crypto market collapse, Twitter-based analyst Light crypto, noted that the digital assets behaviour mirrored that of risk-on assets like securities and stocks. This contradicts the notion that crypto market is uncorrelated to the conventional financial markets.
XBTUSD swap overlayed on S&P futures (Source: Light Crypto)
If you were thinking Bitcoin is a safe haven asset, think again.
One look at Bitcoin’s performance overlaid on the S&P futures is enough to change one’s mind. The chart shows uncanny correlation proving that cryptocurrencies are also risk-on assets just like securities and stocks traded on the financial markets.
The spectacular nature of the crypto market plunge means their performance was worse in comparison to other assets. More critically, the drastic and fast price plunge exemplifies the volatile nature of cryptocurrencies which discounts the notion that they are ideal safe-haven assets.
I bet, no sane investor would be willing to stake the entirety of their fortune in these highly volatile and unpredictable virtual currencies. At least not for now.
A substantial section of the crypto community believe that cryptocurrencies are ideal financial instruments for retaining one’s wealth in the long term. The virtual currencies have repeatedly maintained or even gained value during economic downturns and financial market crashes. This negative correlation with the economy as a whole has been a major selling point for Bitcoin and other digital assets.
Just this week, the crypto market debunked this belief showing that cryptocurrencies may not be the previously thought safe-havens after all. Sure enough, the crypto market held its own for days, containing the external pressure as much as possible. This is unlike the global financial markets that begun to crumble after the first signs of pressure. But, this is nothing as compared to more serious occurrences with potentially more disastrous outcomes.
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