How does Covid-19 impact cryptocurrencies?

Cryptocurrencies might just be the best medicine against Covid-19. Figurately speaking, of course. Vaccines are being rolled out in a number of countries as we speak — and this is definitely good news! However, the current unprecedented situation has severely damaged our economies and the crisis is expected to have serious long-term implications. So, is there a way to inoculate yourself against the economic repercussions of a worldwide pandemic?

Surprisingly — or rather not, in our opinion — it is the cryptocurrencies that might hold the key to combating the downward spiral of economic losses. Keep on reading to find out if digital assets can really strengthen and safeguard your investment portfolio.

What has been the impact on cryptocurrencies so far?

Traditionally, cryptocurrencies have been considered non-correlating assets, meaning that digital tokens’ value follows different patterns than other assets’ such as fiat, gold, etc. However, in a previous post, we observed that Bitcoin, the most predominant cryptocurrency by far, had started to somewhat correlate with other assets this year.

If we go back to the beginning of the current pandemic, virtual tokens seemed to be suffering as much as other asset classes, including gold. The whole financial world, both traditional and digital, was at a fragile state. That, however, was due to an initial liquidity crisis. According to behavioural finance studies, in times of economic turmoil, “people tend to convert all liquid assets to cash to be prepared”.

Later on, Bitcoin bounced back and market observers could contemplate how the king of cryptocurrencies was correlated with gold stronger than ever, whereas there was an inverse correlation with the US dollar. Bitcoin’s price has continued to climb and hit new records, surpassing even $25,000. For many, virtual tokens are, therefore, becoming more attractive — in Europe and the US, over a third of institutional investors own crypto assets. At the same time, traditional money has got cheaper and cheaper as central banks have not stopped printing and increasing the amount of circulating supply.

This is the advantage that deflationary cryptocurrency offers — its amount is limited, so you can be certain that you will not lose any money due to decreased value caused by oversupply. It will be interesting to see the final figures once the year is over, but we have a gut feeling that crypto’s performance in 2020 vis-à-vis other asset classes will be jaw-dropping. Already in September, it was reported that digital currencies in general, not only Bitcoin, were outperforming even such rock-hard assets as gold.

Throughout the pandemic and the resulting lockdowns, what we have seen is a growing demand for digital products and services, as well as for an increasingly digital financial ecosystem. Investments are moving towards disruptive companies and modern sectors such as “data, remote working, online education, and sustainability”. It is most likely that this trend will continue, as more and more governments and institutions grasp the importance of digitalization. This is the long-term positive effect the pandemic will have in our society — the bright side of our “new normal”.

Is crypto a safe haven?

So, is cryptocurrency a safe haven, a refuge in times of trouble? First of all, it must be said that, as with anything, there is no consensus among experts and scientists. Some studies (e.g. Conlon & McGee, Corbet et al.) have found that digital coins do not offer any additional protection and can even increase your investment risk. On the other side, though, we have a number of articles concluding the opposite, saying that cryptocurrencies can be beneficial in many ways.

A recent study by Goodell & Gouette, for instance, found that during the coronavirus pandemic, Bitcoin did indeed act as a safe haven. The authors observed the daily data, examining the number of global Covid-19 deaths and Bitcoin prices side by side, and concluded that there was comovement between the two phenomena and, therefore, evidence of Bitcoin offering a good alternative to traditional assets. Other researchers found that it was Tether that acted as a safe haven during the coronavirus pandemic.

Furthermore, cryptocurrencies can act as a hedge in economic turmoil, against phenomena such as coronavirus. Following the example of researchers that had previously explored correlations of Dow Jones and S&P 500 indexes with the pandemic, a study from July concentrated on the relationship between Covid-19 cases/deaths and three cryptocurrencies (BTC, ETH, XRP). The authors concluded that the result of the analysis “supports the hedging role of cryptocurrencies against the uncertainty raised by Covid-19”. Those findings are in line with previous studies by Bouri et al. (2017) and Demir et al. (2018) about Bitcoin.

The fact that cryptocurrencies are especially resilient to different crises is not surprising, especially in the economic context of vertiginous money printing and inflation. The cryptocurrency was born to counter financial storms — Bitcoin was created as a response to the last economic crash of 2008, designed to offer an alternative to the flawed banking system and resist pressure caused by economic hardship. This is exactly what we have seen in recent months — cryptocurrencies succeed where other assets fail. Some have even called the pandemic “the perfect storm for Bitcoin“.

Whereas we will have to wait and see what 2021 brings for the crypto world, what we can do right now is to look back in time and learn lessons from the past. So, is crypto a fruitful addition to an investment portfolio? According to a recent study, the answer is a resounding “yes”! Looking at the performance of 6 different types of investment portfolio between 2013 and 2019, the inescapable conclusion is that “a mere 1% allocation to crypto assets over the past few years could have nearly doubled your investment portfolio’s overall, risk-adjusted return”. According to the authors, an allocation of 1% to 5% of digital tokens “not only generated additional returns, but also increased the sharpe-ratio severely”.

As they say, you should have started investing yesterday.

So what does the future hold?

Unfortunately, we cannot predict the future. But you can prepare for it to the best of your knowledge, the best way you can. So far, digital assets have proven to be a valuable addition to the investment portfolio. Furthermore, this year’s once-in-a-century pandemic has created an unprecedented opportunity to reset our financial and economic systems. Among other things, the crisis has clearly shown that we need to become more digital and resilient to inflation, and cryptocurrencies can achieve just that.

Whatever the future holds…

“Good investment luck and all the best for 2021!”

GloCurEx team