Crypto corner: How crypto has been affected by the coronavirus outbreak

Cryptocurrencies across the board have demonstrated interesting correlations with major equity markets over the past few weeks, reacting sharply to the ongoing global pandemic as coronavirus has grinded industries and markets to a halt. Bitcoin, the biggest digital token by market cap, briefly tumbled into the $4,000s, as the US Federal Reserve on 15 March took dramatic actions to once again bring its benchmark interest rate to the zero to 0.255 range to inject more cash into the economy.

With markets reeling under extreme pressures over fears of a slowdown, central banks around the world are looking to offset the duress by introducing massive stimulus packages.

Bitcoin, which was developed in the midst of the financial crash of 2008, was modelled to exactly offset such market volatility, as people lost trust in the banking structures and central bank interventions to ‘manipulate’ value.  But with traditional investors increasingly entering the crypto space as portfolio diversification, the crypto market has started to emulate equities hence the current dip.

Smashing the safe haven narrative

A safe haven asset is something where money flows into for stable but modest returns in an effort to escape volatility. A commodity, which can lose 40% of value in a single day, can never be an asset in crisis. Under a market rout, liquidity remains the primary focus as investors seek to stop losses and look to raise cash. Safe haven assets such as gold have also not held much value as investors seek to maintain a cash flow to balance losses.

The coronavirus pandemic, which has been the biggest challenge for the markets than 9/11 and the subprime crisis of 2008, has quelled any inaccuracies in portraying cryptocurrencies as safe haven assets. Bitcoin and other decentralised currencies are therefore not a hedge against pandemics, but against fiat currencies and central bank manipulations.

The road ahead

The pandemic has demonstrated the severe fissures in traditional financial structures – a world of financial valuation dependent on cash flow. Currencies such as bitcoin and other digital tokens, which do not depend on cash flow for value but on utility and acceptance, have the potential to provide true independence. By integrating them into the traditional finance model risks brings in the volatility but it can also deliver the long sought-after opportunity they deserve.

Secondly, unlike oil and commodity markets, which depend on volume and demand, cryptocurrencies gain value because of their network and the transparent online transactions that they provide – the financial model of the future. Their value is their technology, unlike arbitrary fiat valuation that we place on commodities such as gold.

Covid-19 is subjecting a new test to investors, who are unsure what the right answer is. Bitcoin and other digital tokens built around utility and financial independence will emerge more resilient after weathering this current crisis.

In the short term, we can expect market volatility to continue, as crypto bulls continue to remain relentless. Bitcoin has risen into $5,000s up, Ethereum into $117s, and LiteCoin into $34s, – a 10% rise from here can again see sell offs amid profit taking. Until Covid-19 pandemic peaks and then settles, the rough tides are to continue. Its times like these when we have to remember we are in a marathon, not a sprint.

Christel Quek is a technology executive who has built brands and digital businesses since the advent of the digital economy. She is co-founder and chief commercial officer of BOLT. She is also an advisor to Zilliqa, a next-generation high throughput blockchain platform, and an advisor to Switcheo, the world’s first multi-blockchain decentralised exchange. Previously, Quek was head of content at Twitter across international markets and led social business for Samsung Asia.