Although the cryptocurrency market is considered to be uncorrelated with any other asset class, in reality, it is part of the global financial system and sometimes it can be influenced by global factors. That might be the case in 2020, a year when we need to deal with a global pandemic. This might be a healthcare issue but its implications go beyond that and will impact the economy as well as all asset classes. Today we want to answer the question of whether COVID-19 can make cryptocurrencies vulnerable.
Crypto market drops alongside stocks
The past week had been very interesting since the correlation between stocks and cryptocurrencies had risen once again. Global stocks faced their worst week since March and the crypto market followed through. Bitcoin remained capped below $10,000 and was close to retesting the $9,000 area. Ether dropped from $250 to $225 in less than a day, while the global market cap lost around $15 billion in value.
On their way up, cryptocurrencies and stocks had different performances, with crypto outperforming yearly by a large. Both markets are well-synchronized on the downside, given an increase in risk aversion is forcing investors all around the world to dump volatile assets. Since stocks are cryptocurrencies qualify, it is normal to see both trading south.
COVID-19 to cap the upside
Because of that, it is obvious that negative developments with the pandemic will continue to drag on cryptocurrency valuations. This new cryptocurrency cycle will have some unique particularities, with COVID-19 expected to play a leading role, at least in 2020, if not over a prolonged period. Since people can’t get back to their normal life to prevent the spread of the virus, economic activity drops, and in return, asset classes must face a repricing process.
Central banks had been aggressive in providing ample liquidity, which proper assets higher. At the same time, this led to cryptocurrencies having the upper hand against fiat, since central banks are unable to control the crypto market, yet. With fiat losing its purchasing power, any other asset will be a better investment.
However, in the short run, as COVID-19 cases continue to rise, it will be harder for both cryptocurrencies and stocks to continue higher. The global economy will continue to face headwinds and investors all around the world will rush into safe-haven assets like gold and bonds. How long do you think COVID-19 will continue to be around and how will cryptocurrencies perform in the near term? Feel free to share your comments below.