• Thursday, June 13, 2024
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BusinessDay

Why cryptocurrency market is no safe haven amid global volatility

Is bitcoin really an “uncorrelated safe haven”?

As the price of bitcoin, the world’s largest cryptocurrency by volume hit $6,000 for the first time since May, 2019, it is becoming apparent that the digital currency may not be the safe haven it is often projected to be.

The global market has been badly shaken by the outbreak of Coronavirus declared a ‘Pandemic’ by the Wordl Health Organisation (WHO) and the consequent trade war between two of the world’s largest producers of crude oil, Saudi Arabia and Russia.

On Tuesday, the UN’s trade and development agency said the outbreak could cost the global economy up to $2 trillion in 2020 and warned that shock from the epidemic will cause a recession in some countries and depress global annual growth to below 2.5 percent.

In Nigeria, stocks sold off and risk premium hit new peaks as investors demanded higher to hold Nigerian assets from local bonds to Eurobonds.

The cryptocurrency market, uncharacteristically, has failed to capitalise on the negative news. Usually, investors would expect the market to react positively to the disturbances in the global economy with prices of digital currencies like bitcoin hitting record levels. The prevailing notion is in times of economic uncertainties, demand for digital assets and gold has often peaked as investors seek alternative investment vehicles.

Instead, the market has taken a downward slide whereas the gold market is heading northward. Market capitalisation for cryptocurrencies declined by $26.43 billion on Saturday as bitcoin the largest digital currency, dropped as much as 16.4 percent from Friday’s close after extending a sell-off begun over the weekend. On Monday it was trading at around $7,726 making it the biggest one-day slump since February 2018, according to consolidated pricing compiled by Bloomberg.

On the Luno exchange, Ethereum also slipped down slightly, unable to hold above $200, and Ripple (XRP) has also struggled to break back above $0.21. Bitcoin Cash also dropped back to $267.

Marcus Swanepoel, CEO of Luno told BusinessDay that the dramatic events of the last 48 hours were down to a combination of the increasing spread of the coronavirus and the drop in the oil price.

“Logically, the only one of these which could have a quick solution is oil, but that seems unlikely. So we hope that investors will look at cryptocurrencies and decide a lack of correlation to the main markets is a very good thing,” Swanepoel said.

In a weekly analysis Luno sends out to its more than 3.5 million, Luno suggested that institutional traders are taking a break from digital assets like bitcoin, given the uncertainties that have gripped the global market as a result of the coronavirus.

“While de-risking is a potential motivation, it’s likely that the sudden drop in the stock market had an effect through margin calls leading to a short-term liquidity squeeze,” the company noted in the research it did in collaboration with Arcane Research.

The market entered 2020 with loads of positive expectations. First, prices started a very positive note as demand for digital assets gained traction. There is also the much talked about Bitcoin Halving expected to take place in May. By far the most important news for the market in 2020 was the removal of legal hurdles on the trading of cryptocurrencies in India and South Korea. In the case of South Korea, the representatives passed an amendment to the country’s financial services laws that would authorize Korea’s financial regulators to effectively oversee the nascent industry and develop rules around anti-money laundering among other processes.

While the two cases which came in March were widely celebrated, they have had little or no effect on the prices of cryptocurrencies much to many investors dismay.

“Legalization is not that widespread and if anything it is supposed to make Bitcoin behave more like gold and not less like it because people would have more faith in the asset. Instead what we have seen is Bitcoin dropping from a correlation with gold of 0.82 over the prior year to a low of -0.22 over the past month” Buchi Okoro, CEO of Quidax told BusinessDay. “There are some speculations as to the cause of this puzzling move but nothing is set in stone, for now, we are watching the charts and markets to make sense of it.”

Jacob Canfield, a market analyst describes the southward movement of the cryptocurrency market as the first true test for Bitcoin as a store of value.