Corona Virus (COVID-19), already claimed lives of more than nine thousand and affected more than two hundred thousand has created an alarming situation among the masses. Initially, the outbreak was confined to the Wuhan province of China, but now new cases are coming from middle east Asia, North America, and other continents. It has taken a toll on several industries, aviation and tourism are a few to mention. Also, it has deeply affected the global supply chain since China is a manufacturing hub and central to the world supply chain. But the sector which we are looking here is the financial sector.
There is a slump in almost all the stock market indices across the world amid the rising tensions due to the recent outbreak. As reported by CNN, the coronavirus crash has wiped $9 trillion off stocks already with global markets still falling. However, since the onset of this year Bitcoin, Ethereum, and a few other cryptocurrencies have seen a surge in their stock prices amidst the rising global tensions.
Talking about the bitcoin, it is fairing over $9000 in the market, as on 7th March 2020. The jump in the share price is more than 28 percent in the past two months as the prices had nosedived to less than $7000 per coin at the end of the last year. Does this reiterate the beliefs of many cryptocurrency enthusiasts that bitcoin and other cryptocurrencies are safe havens for investors in times of economic crisis? Or, is the current growth has been derived from other factors?
Due to recent uprising of the bitcoin, several investors believe that these cryptocurrencies have joined gold as a safe haven asset in the times of economic uncertainty. During the last week when the news of the outbreak started to pour from several countries, it was speculated that this will lead to further price boosting of the cryptocurrencies. However, the price of Bitcoin and other cryptocurrencies had fallen or remained stable in the last week. This defies the hypothesis of Bitcoin becoming a safe haven like gold in economic turmoil. This is due to the fact that in times of turmoil, the traders generally sell equities and invest in gold. However, these traders are not active in the coin markets, therefore, it would be wrong to justify the uprising of bitcoin to economic uncertainty.
Now, the question lies, what has contributed to the rallying of these coins? One of the factors that may attribute to the uprising is the Bitcoin halving scheduled in May. Historically, whenever the supply is cut, it has resulted in boosting of Bitcoin prices. Many believe that this may be the real reason of the boost rather than the economic or political instability.
According to financemagnates, cryptocurrencies lack the scale or the institutional adoption to prove its mettle as a safe haven in times of political and economic uncertainty.
The bank notes increase the chance of spreading of corona virus, as a result, Chinese authorities are quarantining the used notes to check the spreading. Usage of bitcoin and other cryptocurrencies for payment purposes can reduce the chances of the infection. Similarly, other digital currencies and payment platforms like Alipay, PayPal etc can reduce the chances of infection. Moreover, Chinese authorities, in order to contain the spread, have begun shutting down crypto miners.
There are both sides to this development, the good is that it will reduce the heavy centralization of bitcoin mining from China to other places and allow the retail miners to get a slice of the action as mining will become easier comparatively. The flip side is that it may affect negatively to the health of the network.
In recent times, it would be premature to assume that cryptocurrencies have a significant impact in creating safe havens for investors during economic turmoil caused by Corona virus or other epidemics. We need to wait to find suitable metrics to correlate them. Till now, it can be concluded that a sustained panic would lead to a fall in coin prices, however, less than that of the broader markets.
About the Author:
Abhishek Kumar is pursuing MBA in Finance from IIM Lucknow. A computer science graduate who has worked in Fintech industry, he is always keen to learn about developments in financial sector, technology and innovation.His interests include eclectic reading, and technical and experiential writing."
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