In the months since the novel coronavirus (COVID-19) gained global visibility, governments around the world responded by taking drastic action. At the time of this writing (27th March 2020), health care professionals had confirmed more than 375,000 cases and more than 15,000 people had died, according to the World Health Organization (WHO).
The global outbreak, which the WHO labeled a pandemic on 11th March 2020, has had a significant impact on the economy. Many countries have gone into lockdown mode, temporarily shuttering businesses where people may congregate en-masse. Reports have circulated about retail stores around the world that have run out of basic materials like toilet paper.
Amid these conditions, financial markets have certainly responded. While a separate Insights piece explored the more general impact that coronavirus has had on the broader financial markets, this article will look specifically at the impact on the digital currency markets.
The digital currency markets are notorious for experiencing sharp price fluctuations, and the months where coronavirus fears grew were no different. On 31 December 2019, a form of pneumonia, whose cause was uncertain, was identified in China.
By 13 January 2020, WHO officials reported the first case of coronavirus outside China; it was in Thailand. On 11 February, the WHO named the affliction COVID-19. Shortly after the disease received its official name, the broader digital currency markets began going into decline, losing more than half of their value between mid-February and mid-March.
More specifically, the total market value of digital currencies tracked by CoinMarketCap fell from US$308 billion on 14 February to less than US$118 billion on 12 March. Bitcoin, the world's largest digital currency by market capitalisation, dropped from above US$10,400 on 13 February, to less than US$4,120 on 12 March.
Other digital suffered declines as well, with Ether, the second-largest digital asset by market capitalisation, falling more than 66% between 14 February and 12 March, according to CoinMarketCap. XRP, the digital token used by the Ripple network, experienced a similar drop, losing roughly 66% of its value during approximately the same time frame.
At some points, digital currencies and stocks moved in the same direction as both fell in value. However, this relationship broke down at other times, with Bitcoin experiencing sharp gains while stocks failed to rally. Some analysts referred to the divergence of stocks and Bitcoin as the "decoupling."
Bitcoin's Safe-Haven Status Questioned
At times, analysts have described Bitcoin as a safe-haven asset, depicting it as something that investors flock to during times of geopolitical turmoil. In March 2013, for example, the digital currency's price skyrocketed as market participants grew concerned about the viability of island nation Cyprus's banking system. Around this time, Bitcoin's value rose more than 80% in less than a month.
A few years later, in June 2015, the digital currency once again climbed as discussions involving Greek debt went off the rails. The situation involving the European nation was probably the only reason that Bitcoin prices climbed, said Brendan O'Connor, who was at the time CEO of institutional trading firm Genesis Global Trading.
In 2016, Chris Burniske, a prominent blockchain analyst, argued that Bitcoin could be described as digital gold. When speaking with CNBC, he noted the similarities of the cryptocurrency and the precious metal. "Bitcoin shares those same characteristics" that make gold a compelling store of value, he stated.
Both of these have a rather limited supply, he added, and they can both be used in commerce. While Bitcoin can be harnessed for transactions, gold is used in electronic circuits.
Around the time that global market participants became spooked by coronavirus in early 2020, the perception of Bitcoin as a safe-haven asset came into question. Stocks had a rough day on 12 March, with the broader market suffering its worst losses since 1987, but Bitcoin fell even more, declining more than 25%.
One major draw of digital currencies is that as a general rule of thumb, they don't correlate with more traditional asset classes like stocks and bonds. Burniske actually delved into this very topic, co-authoring a white paper named "Bitcoin: Ringing the Bell for a New Asset Class."
"Bitcoin is consistently the lowest correlated asset to other traditional asset classes," Burniske wrote. "If an investor who holds bonds and equities swapped a percentage of their prior holdings into Bitcoin, because of Bitcoin's low correlation and superior absolute performance, they could have decreased the volatility of the portfolio while simultaneously increasing absolute returns."
"That's the golden bullet of an asset class," Burniske added.
While non-correlated assets can certainly bolster diversification, Bitcoin fell sharply at a time when more traditional assets (specifically stocks) were suffering notable declines. However, it is important to note that this instance of Bitcoin and stocks moving in tandem may simply be an anomaly.
However, if Bitcoin continues to follow the price movements of stocks, it will reduce one major draw of using the digital currency.
The coronavirus scare has had a substantial impact on the global economy and financial markets, forcing many businesses to shut their doors and causing asset values to decline. Digital currencies have also been affected, falling in value and therefore moving in the same direction as more traditional assets.
While many analysts have portrayed Bitcoin as a safe haven during times of geopolitical uncertainty, its behaviour during the pandemic undermined this perception as the digital currency's price moved in the same direction of stocks. This activity fueled doubts about Bitcoin's use as a diversifier, as it lost value right along with more traditional assets. On the other hand, its move in the same direction as stocks may have simply been a temporary occurrence.
In other words, market observers may benefit significantly from watching digital currencies to see how their prices behave going forward in these difficult times.
Past Performance: Past performance is not an indicator of future results.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…