Published: April 28th, 2020
Fear spread in the crypto circles when Bitcoin, long considered a risk-on asset, displayed characteristics that were eerily similar to those of the traditional markets. In Early-March, the world’s first cryptocurrency Bitcoin, S&P 500, and several other benchmark indices fell by almost similar margins and in the same pattern. However, this correlation only seemed momentary. As the firm effects of the coronavirus set it and with the elaborate sell-off witnessed, Bitcoin is gaining its position as a safe-haven asset.
After coming from a steep dive that saw Bitcoin reach the depths of $3,800 around mid-March, the benchmark crypto has managed a substantial gain to $7,800 the morning of Friday, April 24. The more than 100% rally is not only a show of the coin’s resilience but an indication of the violent reaction that the bulls put in as well as the effects of the massive stock sell-off.
Importantly, the rebound highlights the underlying strength of Bitcoin and the relationship between the cryptocurrency and its holders and ardent believers. The surge also serves to dispel the latest belief that Bitcoin is not a safe haven asset.
With the trends between Bitcoin and the major stock indices sinking in tandem, a cross-section of market experts has gone on to propose that Bitcoin not be considered a safe-haven asset.
The coronavirus pandemic brought the stock markets, and indeed the global economy to their knees in the Q1 of 2020. The ensuing lockdown confined hundreds of millions of people worldwide indoors. The orders frayed global supply chains and massively disrupted most activities.
Countries and companies in all segments of the economy, as such, have adjusted their growth projections downwards. The markets, not surprisingly, have declined substantially between January and March. The S&P 500, for instance, shrunk almost 20% during the said duration.
Bitcoin and other cryptocurrencies, following the precedence set by other segments of the markets, fell substantially. The premier crypto experienced a major sell-off midway through Q1 of 2020, going down about 10% overall year-to-date as a result.
Compared to the major indices, however, Bitcoin’s fall was not as drastic. The two other major U.S. stock indices; the Dow Jones Industrial Average, and the Nasdaq Composite fell 23% and 14%, respectively during the time in question.
Data has helped prove that crypto markets are not similar to the traditional markets. The market figures for Q1 of 2020, however, has moved to distort beliefs. The traditional markets and their cryptocurrency counterparts assumed a similar path. Both opened the year on a promising note. By mid-February, the Dow Jones was already on its way to the 29,000 levels, an all-time high. At the time, Bitcoin was up 40% year-to-date.
The outbreak of coronavirus in China and the ensuing pandemic then quickly doused the fires of the ongoing party. As a result, the Dow slumped almost 40% for the peak figures; a scenario that was replicated across all global markets.
Bitcoin and the cryptocurrency market fell in tandem with the other commercial segments. The world’s first crypto slipped almost 50% from the 2020 peak. Due to these figures and the stark correlation, Bitcoin did not quite seem like the safe-haven asset that most market experts touted it to be. Incidentally, gold rose by about 5% during the turmoil to trump Bitcoin and land the title.
A top analyst thinks that despite market sentiments, using the momentary correlations to assign Bitcoin a position in the market is dumb. A former Wall Street operative Siddhartha Jha says that the markets have witnessed periods where Bitcoin trends correlated with those of other assets. However, such durations have been short and whatever data that can be extracted from them do not paint a comprehensive picture of the whole lay of the land.
Oil, another haven asset has not been as lucky. The commodity has lost more than 85% of its value at the beginning of the year. The situation has been so bad that the May contracts slipped into the negative territory, trading at -$38 a barrel; meaning that traders were willing to pay buyers to take the commodity off their hands.
The slump of oil, however, is not entirely due to the coronavirus pandemic. Long before the turmoil that resulted from the pandemic, Russia and Saudi Arabia had been engaged in a grueling price war.
By the time President Trump and OPEC brokered peace among the opposing ends and agreed to cut production, the asset’s price was already on a downward spiral.
The tempered climbs that gold managed and the drastic decline in the price of oil, however, is not conforming to traditional trends. The two are considered by market experts as hard assets; and as usual, such often experience significant bullishness at times of global economic meltdown or market instability.
In keeping with the highlighted gains and losses, Bitcoin, which has managed an overall 5% increase year-to-date and almost 20% climb quarter-to-date is setting a significant precedent. The figures reaffirm the fact that the coin has held up impressively despite the health crisis and the looming economic troubles.
According to the data from Glassnode, online research and analysis platform, the Bitcoin network has experienced a spike in the number of entities. This points to an increase in the number of new users.
The data concludes that the new entrants to the Bitcoin environment could be an indication that investors took note of the poor performance of oil and opted for cryptocurrency, which is now attractive.
The economic downturn that the global markets are undergoing has seen every major asset take a hit. With the stocks tumbling and the oil prices diving steeply, an increasing number of investors are streaming into the cryptocurrency space; the seemingly safer alternative. This situation confirms that even though price action of Bitcoin temporarily aped the market trends of the major indices, it is a safe haven asset.