Author: Mike Schwartz
Estimated read time: 5 minutes
Publication date: 1st Apr 2020 13:41 GMT+1
Right now, we’re in the midst of a global financial crisis that came about quite suddenly. While there have been some warnings of economic slowdowns or possible recessions in some of the world’s most influential economies for a few years now, the spread of the COVID-19 virus has brought about (or perhaps just hastened) economic calamity. Industries have slowed around the world, markets have declined dramatically, and many have lost jobs. And in the process, many have been curious about how leading cryptocurrencies would react.
So far, the answer is that they haven’t responded well. Our recent post on ‘Bitcoin Crash Raises Questions About Need For Circuit Breaker’ looked at what’s happened with bitcoin in the midst of the pandemic, and the picture isn’t pretty. As we wrote there, bitcoin became “one of the latest casualties of the coronavirus pandemic.” At that time, it had recently suffered a 55% drop in a span of 24 hours. And while the cryptocurrency has since rebounded somewhat, there are now some fair questions for investors to ask.
One such question is why bitcoin didn’t spike instead. To some, this may seem like an unrealistic expectation to have had. And in fact, perhaps we’ve learned that it was just that. But the fact is that for years bitcoin has been pitched by advocates as a potential “hedge” or “safe haven” against market downturns. In fact, as recently as mid-March, Yahoo Finance covered bitcoin as a safe haven, suggesting that the cryptocurrency will bounce back to become a stable investment asset even as economies and traditional markets continue to struggle.
Maybe that analysis is correct maybe in another few months we’ll look at bitcoin as having been a rare trading bright spot in the midst of this global catastrophe. In the meantime though, it’s worth considering what might be some of the reasons bitcoin hasn’t been the hedge or haven many thought it might be up to this point.
“Investors are clearly overwhelmed by bad news.” This was an interesting line written in an Independent article about “bitcoin meltdown” and perhaps it explains the crash as well as anything. The article pointed out that gold, too, sold off alongside global markets once the scope of the pandemic became clear, indicating that investors of all kinds were spooked. It may in fact be that simple: Maybe a global panic of this magnitude inevitably overcomes those features of cryptocurrency that led people to believe it could be a safe haven.
Lack of Familiarity
For bitcoin to be a true safe haven, and see its price rise substantially during an economic crisis, it would likely require new investors, as opposed to just reliable activity from existing traders. And the simple fact is that a lot of people who might consider seeking out a safe haven still don’t know how to deal in cryptocurrency. This may not seem like the case to those who are well versed in bitcoin, but the options can be somewhat dizzying to newcomers — even if the reality is that they’ve become simpler over time. Today, crypto exchanges are more accessible than they’ve ever been. Additionally, a Plus500 guide to trading cryptocurrency details that bitcoin and similar options can now be traded in the form of CFDs, as a means of prohibiting significant losses. But to worried investors looking for safe investments, the idea of learning how to operate a brand new exchange, or of trading unfamiliar cryptocurrency CFDs, may have simply been too unfamiliar to try at this time.
This idea ties into the point about panic made above. But we might also consider that around the world, would-be investors’ priorities were simply to protect their assets, rather than find somewhere to grow them. That is to say, with markets in free-fall and the pandemic only just beginning, bitcoin may have fallen purely as a result of people’s decisions to pull money out of investments altogether, as opposed to shuffling them around.
During the crash, TechCrunch wrote that bitcoin was “having a very, very bad day” alongside traditional markets. And in that piece, it was stated that “uncertainty has led to [today’s] crypto asset selloff.” The implication was that even though many believed cryptocurrency might move with an inverse relationship to ordinary markets, the unproven nature of that expectation led to uncertainty, and thus dissuaded investors. Even if all of the above is true — that traders panicked, that would-be investors simply don’t know yet how to trade cryptos, and that the priority was to withdraw assets — it appears very likely that uncertainty also played a significant role in bitcoin joining the crash.
We don’t really know yet what bitcoin’s movement in the time of COVID-19 will ultimately look like. There could be significant fluctuations yet to come, and for that matter we don’t know how long the health crisis might last. For now though, the points above may explain why the arguments for bitcoin as a hedge or haven haven’t panned out.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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