In a recently conducted study, an empirical analysis was undertaken to examine the situation of the cryptocurrency market in response to the outbreak of the coronavirus pandemic. It has been a year since the pandemic has wreaked havoc in the world. However, all indicators point to the fact that this particular market has seen a growth. For example, in the initial days of the pandemic, the first cryptocurrency of the world – Bitcoin – was purchased at $7,300.
At present, the same token has a price greater than $46,800. In other words, there has been a staggering rise of 640 percent. Other cryptocurrencies such as Ether have displayed similar, and in some cases, greater growth. However, this trend isn’t something that is parallel to a theoretical understanding of growth in price. There are multiple forces that impact the movement of the demand curve during a crisis.
One set of forces can lead to a high demand for cryptocurrencies amidst a pandemic. The fact is you can trade cryptocurrencies from all over the world. This in turn alleviates the liquidity constraints that usually occur due to restrictions imposed by the government vis-à-vis trading activities during the lockdown. Consequently, cryptocurrencies attracted more people compared to its alternatives when it comes to trading.
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Additionally, investors were apprehensive of the interference by central banks and political actors in the market due to a crisis. As a result, they decide to switch over to a decentralized cryptomarket for investments. Since it is not managed by a central institution but in fact operates automatically, investors can hedge some political risk.
However, there are other forces that can push demand downwards. Cryptocurrencies have a close relation with traditional financial markets especially amidst a crisis. Such correlation isn’t visible during normal times, which is why there’s zero benefit in switching to crypto during normal times. At the same time, the pandemic can cause a chaos that leads to hazardous activities causing substantial losses.
Firstly, sophisticated investors can manipulate the cryptocurrency price referred to as “pump-and-dump”. This is done by increasing demand artificially which lures the unsophisticated investor who then their holdings as soon as the price rises sufficiently. This usually happens due to a certain herding behaviour of people, that is, when they see others doing the same.
Secondly, prior to the pandemic, cryptocurrency was suspected to aid criminal activity. In other words, the features that make cryptocurrency such an attractive alternative amidst a crisis, works for criminals as well. Due to this, many people are not confident in investing as they don’t want to be linked to criminal charges in the form of money laundering.
Now that the growth of the cryptocurrency market has been established, it seems that the first set of effects have had a strong impact. However, the uncertainty that has been revolving around the pandemic has been resolved as vaccines are now available and so is medical treatment.
It hasn’t been established however as to how much investors have responded during the uncertainty phase. A study of the trading volume of top 100 cryptocurrencies linked to the number of coronavirus cases in the initial days of the pandemic has exhibited three distinct findings.
Firstly, there is a positive correlation between number of new cases (along with deaths) as well as the cryptocurrency market cap. This indicates an upward tick in the cryptocurrency market. Secondly, there is a certain inverse U-shaped relationship that can be seen between the cryptocurrency and the spread of the virus. In other words, when there were more cases, there was an increased investment in the market. Now the effect seems to be in reverse even though it’s said to be temporary.
There is a reason behind this reversal. One possibility is that people had panicked in the first phases of the pandemic. This is why they pulled out of traditional markets but returned once the crisis became clear. This kind of a behaviour is usually expected during risk-hedging as suggested by the benefits of crypto mentioned previously. Another possibility is that people were affected by the pump-and-dump nature of crypto or the fact that it can used for furthering criminal activities.
A number of emerging markets are moving to incorporate Bitcoin as well as other cryptocurrency in their economy. For example, Costa Rica made an announcement that it will pay its employees in cryptocurrencies. Consequently, there was a spike in its adoption in the country. Another example is the Philippines that is championing crypto. The central of the country approved around sixteen cryptocurrency exchanges. Philippines is now one of the foremost Southeast Asian countries vis-à-vis the application of crypto.
Even though it was introduced just a decade ago, the use of crypto is growing at a rapid rate. An entire system is being built around it and industries are beginning to use them globally. Some have been resorted to cryptocurrency to seek refuge amidst a raging inflation during the pandemic. Banks too have started providing cryptocurrency services to clients, despite the fact that they were totally against crypto at one point.