While cryptocurrencies began as a peer-to-peer payment system, they have emerged strongly as an important asset class. Cryptocurrencies have received an extraordinary amount of attention from investors in recent times due to the huge returns and unprecedented gains offered. Read on as we explore the impact of cryptocurrencies and how they appear to behave in an extreme financial climate.
The correlation between Bitcoin and the equities market has increased
Since the advent of the pandemic, the correlation between Bitcoin and the equities market seems to have increased. To illustrate this: When the price of Bitcoin dropped below $4000 in March 2020, this was a direct consequence of the dramatic drop experienced by the S&P Index in the US. This was attributed to investors who had margin calls in equity that needed to be secured by liquidating their assets like Bitcoin into cash.
Whilst Bitcoin’s current trajectory looks very promising, experts say that it has a long way to go before being regarded as a safe haven like silver or gold. While some view Bitcoin as digital gold, others argue that it amounts to gambling. In terms of the economy, the US government has invested billions of dollars. Essentially, this means that as long as the dollar remains strong, it will be extremely difficult for Bitcoin to replace it.
Bitcoin most resistant to turbulence experienced by all global markets during this period
With the aftermath of the pandemic leaving the global economy in tatters, the fluctuations experienced by cryptocurrencies mirrored changes experienced by other capital and commodity markets. The virtual currency market has, however, showed remarkable stability in weathering the financial storm. This adds weight to the theory that cryptocurrencies should be regarded as mature and fully-fledged financial instruments.
When the pandemic first started, many investors escaped from risky financial investments and turned to Bitcoin, which was seen as a store value and inflation hedge. While Covid-19 infection rates increased globally, there was a sharp decline in global stock markets with a total sell-off of all assets, including Bitcoin.
Bitcoin continued to behave like a traditional and reliable financial instrument in the midst of uncertainty. This was consistent with the behaviour of traditional safe commodities like gold and silver. Once the global stock exchanges started moving upwards, Bitcoin and Ether displayed incredible correlation with traditional financial instruments. This suggests that investors were not afraid of the volatility of cryptocurrencies, but rather confidently included them in their investment portfolios.
In terms of industry analysis, it appears that the cryptocurrency market — and Bitcoin, in particular — has displayed the most resistance to a highly turbulent global market during the coronavirus pandemic.
Countries integrate cryptocurrencies during the pandemic
Many emerging markets have made special efforts to adopt Bitcoin and other cryptocurrencies into their financial environment.
Nigeria leads the way for cryptocurrency and Bitcoin adoption according to a recent Statistica report. Since cryptocurrency can be traded through mobile devices, it makes it easy for regions with limited ITC infrastructure or where people do not have access to computers. Enabling easy peer-to-peer payments through mobile devices is one of the most important factors that attract Nigerians to explore Bitcoin and cryptocurrencies.
Costa Rica is one of the few countries in the world where it is now legal for employees to be paid in cryptocurrency. This impact has seen a surge of interest in crypto investments. Moreover, 90% of the energy in Costa Rica is generated from renewable sources, which ensures greater profits and less damage to the environment. This has encouraged a swift advancement of a cryptocurrency and blockchain ecosystem in Costa Rica, with many US companies setting up new offices there.
In the Philippines, 16 cryptocurrency exchanges have been approved by their central bank, placing them at the forefront of the boom in technology within the South-East Asia region. In Vietnam, however, there has been incredible interest in cryptocurrencies despite the central bank issuing a ban on digital currencies and their ability to facilitate payments. Morocco also finds itself high on crypto trading volume despite being banned by authorities and is itself sitting behind Nigeria, South Africa and Kenya in trading volume on the African continent.
According to Statistica, Vietnam and the Philippines were second- and third-placed respectively — behind Nigeria — in terms of cryptocurrency adoption within emerging markets.
With the stock-market debut of Coinbase on the Nasdaq earlier this week — and the record highs experienced by Bitcoin, Ethereum and Dogecoin — it is clearly evident that cryptocurrencies are here for the long haul.
Whilst the pandemic has upset the financial applecart globally, the cryptocurrency market has remained just as reliable as traditional financial instruments. With Visa, Mastercard and PayPal implementing crypto payment options recently, and Tesla introducing BTC payment options for its electric cars, the future certainly looks promising for blockchain technology and digital currencies, post-pandemic.