By Chee Jo-Ey
AS the Covid-19 pandemic puts equities in a tailspin, many cryptocurrency investors thought that bitcoin would soar as it is seen as an uncorrelated risk asset.
The latest plunge in bitcoin prices, which skyrocketed more than a decade ago when it was first introduced, came unexpectedly in the wake of the pandemic.
According to NASDAQ, on March 12, bitcoin suffered its most violent one-day drop in years, falling from US$7,600 to US$5,300.
Sinegy MD Kelvyn Chuah said: “Like the global equity markets, the bitcoin market has been volatile as well. The entire crypto market cap was down approximately 45% on March 12 but has managed to recover roughly 20% of the market cap on March 20.”
“In a black swan scenario like this pandemic, it’s best to stay on the sidelines with a neutral or non-levered position to allow the market to stabilise first,” Chuah added.
Bitcoin had experienced the third largest percentage price drop in its history, along with its highest-ever correlation with the stock market.
According to Luno country manager Aaron Tang, even though bitcoin’s value has decreased, it has fallen less than other assets, and the reduction came at a time when bitcoin had approached the US$10,000 mark, when some pullback was expected.
“If we look at gold — often seen as a good analogue for Bitcoin — we saw it slump to its lowest rate in over six years towards the end of February, only to stabilise and rise.
“We do, however, need a few months to see if cryptocurrencies, particularly bitcoin, will behave like gold in times of crisis. It’s far too early to say; we need more time to assess the situation, as it’s seldom a good idea to assert these things in the midst of global panic,” Tang said.
Moving forward, Luno sees three potential scenarios with the worst-case one being that adoption rates will be mildly affected, which will continue to impact bitcoin’s price in the short- to medium-turn.
However, it’s not something that will spell significant trouble in the long run, and bitcoin will recover to its original value, according to Tang.
“The likely ‘middling’ scenario is that we’ll see the same level of growth we’re looking at now or back in 2017. In other words, there’s a good upside there. The best-case scenario is people recognising bitcoin as a safe haven, or as an asset with returns — compared against every other asset that is losing value. If that’s the case, it will then become one of the world’s biggest asset classes in just a matter of months,” he said.
Although bitcoin has been uncorrelated to traditional asset classes, it is not necessary that it must rise when the market is down. Covid-19 has sent shockwaves through the capital markets and although bitcoin is an uncorrelated risk asset, it still has risks. — March 26, 2020
