×
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 55.2% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money
×

Why is Bitcoin Declining Amidst Coronavirus?

Bitcoin Declining Amidst Coronavirus - Blackwell Global - Forex Broker

Bitcoin Declining Amidst Coronavirus - Blackwell Global - Forex Broker

Bitcoin emerged as a reliable safe haven asset in 2019, when it gained considerably amidst the global economic slowdown. As the US-China trade war raged on and Brexit talks repeatedly failed, BTC managed to stay afloat, due to its non-correlation with central bank monetary policies and geo-political risks. Unlike fiat currencies, like the US Dollar and Euro, BTC is not impacted by inflation and interest rate fluctuations. Its fixed supply schedule makes it a deflationary asset as well.

However, in 2020, the global economy faces a graver concern due to the Covid-19 outbreak, which has now been declared a pandemic by the WHO. The global financial markets are in turmoil, with heavy panic sell-offs and currency volatility. Investors are flocking towards safe haven assets like gold, the Japanese Yen and bonds. Yet, BTC has failed to rise during these times of intense market uncertainty.

BTC started trading at $7,203 on January 1, 2020 and went on to trade above the $10K mark by mid-February 2020. But, as the viral outbreak spread to more countries, Bitcoin prices went on a downward trajectory. By March 9, 2020, BTC lost 20% of its value since January 2020. On March 12, 2020, it was trading at $5,578, a new low since May 2019. Its market cap declined 30% in a single day, the biggest decline ever since its inception in 2009.

This has led to doubts regarding its value as a safe haven asset. Why is Bitcoin failing to benefit from this climate of uncertainty?

Investors’ Flight to Safety

BTC has suffered its largest drop in seven years, as the coronavirus pandemic reaches unprecedented levels. Investors are panic selling everything, from stocks and currencies to cryptocurrencies. This has wiped out all the gains BTC accrued in 2019. On the contrary, gold is trading at 7-year highs. This shows a gradual decoupling of BTC prices from that of traditional safe haven assets like gold. Gold is up 8% YTD, while BTC is down more than 20%.

This gradual decoupling has been observed for some time now. Data now suggests that the two aren’t as correlated as expected. Through a regression model, statisticians found that when gold increases 1%, BTC prices increase only 0.11%. A report by Arcane Research revealed that the correlation of gold with BTC has dropped from 0.2 to 0 since the beginning of 2020. There does exist a relationship though, but that is not so deep that BTC can be termed as the next “digital gold” or “Gold 2.0.”

So, in times of immense market volatility, when investors are extremely panic stricken, the first resort is gold, rather than BTC. Gold can easily be converted into cash, while the process of converting BTC into fiat is a rather tedious one. Digital assets like BTC aren’t typically bought or traded through traditional brokerage firms.

To be able to transition from being a speculative asset to a credible store of value, BTC has to show a positive correlation with other safe haven assets, like gold and bonds. This is necessary for it to afford investor protection during tumultuous times.

BTC Cannot Protect Against Declining Profits

Another theory offered by Quantum Economics founder Mati Greenspan is that BTC was never a safe haven against declining corporate profits. Stocks are plummeting across the board, as companies are severely impacted by disruption in supply chains, closure of brick and mortar stores, issue of travel bans and postponing of critical events.

Over 150 companies worldwide have issued warnings of substantial drop in corporate earnings. Greenspan argues that BTC has always been a hedge against inflation, geo-political risks and central bank policies, such as interest rate changes. Lower interest rates reduce the cost of holding zero income assets and also lead to increased inflation, which makes deflationary assets like BTC more valuable.

This is what happened in 2019, when interest rates were being slashed frequently by the world’s major central banks. BTC, however, cannot protect against loss in corporate profits.

On March 12, 2020, The European Central Bank (ECB) surprised the markets by not cutting interest rates in response to coronavirus fears. Rather, it announced a stimulus package to pump additional liquidity into the market, by buying €120 billion worth of bonds and assets through 2020. This resulted in BTC prices tumbling, along with that of Ethereum (ETH), Ripple (XRP) and Litecoin (LTC).

Bitcoin’s volatility is high, compared to assets like gold and fiat currencies. Its volatility needs to decline significantly for it to be accepted as a long term store of value. This can be done through:

  • Stabilising supply
  • Ensuring more secure storage
  • Longer history
  • Greater liquidity
  • More clarity regarding regulatory environment

Right now, BTC is more of a deflationary asset, due to its pre-determined supply. This supply will be slashed by 50% in May 2020, in the halving event.

A Temporary Phase

Market analysts are hoping that this is just a by-product of the global trend of sell-offs, due to the panic surrounding coronavirus. Cryptocurrency exchange BitMEX liquidated $680 million in BTC futures positions, which further exerted downward pressure on the crypto’s price. Once stock market declines subside, BTC and other cryptocurrency prices are likely to resume their correlation with gold price, if not climb to higher price levels. The equities market might reach a bottom, which could spark investor interest in buying cryptos.

While the digital asset is projected to bounce back in the long term, its value as a hedge against economic uncertainties is doubtful at present. However, over the longer term, anything that devalues other currencies or anything that’s inflationary could strengthen the purchasing power of Bitcoin.

 

Reference Links