Coronavirus Attacks Crypto: Bitcoin, Ethereum take COVID-19 plunge

April 14, 2020

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3 min read

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What's going on here?

In the wake of COVID-19’s global spread, the value of Bitcoin and other cryptocurrencies plummeted overnight to their lowest values in nearly a year, with extreme fluctuations in prices continuing until now.

What does this mean?

The cryptocurrency market has tanked at a much faster rate than many expected. This is in contrast with the stock market which took almost three weeks to fall into a bear market (the name given to when market prices are falling fast) as COVID-19 developed into a global pandemic. 

At its lowest, the cryptocurrency market plunged around 50% to $150 billion before restabilising at the current market capitalisation of $175 billion at the time of writing, a far cry from the record $300 billion attained in mid-February. Such volatility calls into question the widely touted argument that such digital currencies are a secure store of value when orthodox assets face adversity.

What's the big picture effect?

The extreme fluctuations in value demonstrate that cryptocurrencies are not as immune to the effects of global events as die-hard enthusiasts would have us believe. While popular cryptocurrencies like Bitcoin and Ethereum have halted the domino effect and regained a certain percentage of their market value, the skittish behaviour of speculators in light of COVID-19 arguably forebodes continued volatility for the time being. This may lead to investment firms and crypto-related companies dialling back on their stakes in the market, especially given the continued spread of the virus and lockdown timelines being extended in countries worldwide.

It has also been argued that the extreme drop in value has had more to do with the repercussions of real-world events rather than being reflective of investor confidence in cryptocurrencies. Investors who suffered heavy losses on mainstream financial markets would naturally have attempted to realise some of their salvageable investments in order to maintain liquidity. This likely played a major role in the downward spiral in value, especially for popular cryptocurrencies like Bitcoin. Rather than a damning assessment of the worth of crypto assets, it is argued that as mainstream financial markets continue to tank, cryptocurrencies will enjoy a greater resurgence of value and investor trust. Given the absolute limit on the number of units of Bitcoin in circulation, it would appear as a more secure store of value than other traditional assets.  This view seemed to be reaffirmed as the cryptocurrency market regained ground over the following week. Yet, Bitcoin suffered a 10% fall in a matter of hours a few weeks ago, sinking below the $6,000 mark which investors had taken as an indication of the industry regaining its ascending trajectory. As of the time of writing, it’s currently trading at around $7,000. 

These developments have occurred recently and in rapid succession, emphasising that there is no one conclusive path that the industry is sure to adopt. Regardless of one’s personal outlook on what this all means for the cryptocurrency market, this variability reinforces that even the digital currency market is far from disconnected from the real world; the asset’s unpredictability is reflected in the uncertain times the world at large currently faces. 

Perhaps these fluctuations will drive home the sobering reality that cryptocurrencies remain a highly risky investment as a consequence of their decentralised non-institutional nature and lack of underlying value. Investors would do well to recognise the extent to which the value of such assets rely on pure speculation and to scrutinise their vulnerability to the effects of real-world events to a degree on par with traditional assets.

Report written by Debra Lim

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