Welcome to The Digital Asset Digest, GDA’s official market newsletter! The Digital Asset Digest will be providing curated insights about the crypto and equities market, amongst other macroeconomic trends. While this newsletter will typically provide a holistic overview of the market, we wanted to narrow our focus today. Therefore, the first volume of The Digital Asset Digest will cover COVID-19, and the grip it currently has on the world’s socio-economic fabric.
With all of that being said, we would like to share some unique insights about COVID-19’s impact on the cryptocurrency markets and how we expect the industry to evolve during these tumultuous times. The sell-off in March was certainly aggressive, but there are a few positive identifiers worth addressing.
BITCOIN VS. COVID-19
Figure 1: Bitcoin YTD Performance
Source: CoinMarketCap
1. As the only true “free market” crypto should be praised, not criticized for its bear run.
Cryptocurrency, in the purest sense, is a ‘free market’; trading desks operate all over the world and stay open 24 hours a day, 7 days a week. Given this context, the sell-off could have been much worse.
Let’s contextualize the crypto markets’ performance by comparing it against conventional equities markets such as the S&P 500 index. Unlike crypto markets, equity trading can be halted by circuit breakers after intraday trading deficits of 7% or more. Even with these preventative measures, the S&P 500 was down 12.5% in March.
Figure 2: S&P 500 1-Month Performance*
Source: Yahoo Finance
*Annotations indicate days on which a circuit breaker was triggered
Comparatively, Bitcoin (BTC) the largest cryptocurrency by market capitalization was down [22%] over the same period. Although on the surface, this disparity is high, when considering crypto operates in an unregulated 24/7 market and equities trade in a highly regulated market with 8-hour trading periods, crypto’s sell-off could have been much worse.
Moreover, if we dive deeper, crypto actually has some positive performance metrics worth highlighting:
- The sell-off is fuelled by what we at GDA are calling strategic necessity. Mining firms and other institutional entities in the crypto space receive a substantial amount of their revenue in cryptocurrency. But like any other business, they have overhead expenses (rent, salary, equipment) to pay in fiat. So this aggressive sell-off is the direct by-product of firms liquidating their crypto assets to protect their businesses as COVID-19 continues to sink its teeth into the world’s socio-economic treads. We know crypto’s institutional players have a fiduciary responsibility to their stakeholders to sell off their assets and protect their business. But what about on the retail side? Our analysts show that retailers’ long-term sentiment is actually quite bullish.
- A recent study found that Coinbase users bought 67% more than they sold, which shows that the market sees this sell-off as overly reactive, and retailers are trying to increase their position.
Figure 3: Bitcoin vs. S&P 500 March Performance
Source: CoinMarketCap, Yahoo Finance
2. The argument that Bitcoin is no longer a ‘non-correlated’ asset is untrue.
Another conversational note our anaylsts have seen across headlines is that Bitcoin is no longer an uncorrelated asset. This is simply untrue.
Bitcoin and other altcoins have been in a bear trading period, just like the rest of the securities and equities markets. However, this is not indicative of crypto no longer being an uncorrelated asset or a hedge against traditional investments. Instead, crypto’s market performance is a product of one thing, fear. When traditional fear arises, there is only one asset that goes up, cash. When fear takes a grip on society, people lose interest in growing their portfolio and instead focus on purchasing essentials like food and water, which can only be done with cash. So the main catalyst for Bitcoin’s bear run is not because it is suddenly correlated to traditional equity markets. Rather, Bitcoin’s bear run is a product of people liquidating their non-cash assets because of rising levels of fear as people race to purchase essential goods.
In the graph below, analysts have plotted the 30-day rolling correlation between Bitcoin and the S&P 500. The correlation between Bitcoin and the overall equity market is clearly in a constant state of flux and our analysts are unconvinced that the sell-off in cryptocurrency and equity markets this month is indicative of their future relationship.
Figure 4: Bitcoin vs. S&P 500 30-Day Rolling Correlation
Source: Yahoo Finance
Although the socio-economic factors affecting the international economy are obvious, we have seen a more aggressive resistance by the market then what could have been expected. We can only hope that this is a sign of continued perseverance by the global economy against the uncertainty of COVID-19.
At GDA we encourage everyone to be diligent and follow the market. Although the outlook is grim now, we anticipate some lucrative entry points in the near future.
Until then, practice social distancing, isolate whenever necessary, and stay safe.
Warm regards,
Global Digital Assets
Quote:
“The risk of a wrong decision is preferable to the terror of indecision.”
– Maimonides
