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“The relative success of bitcoins proves that money first and foremost depends on trust. Neither gold nor bonds are needed to back up a currency” -Arnon Grunberg
Covid-19 results in a great recession in the global economy and affects sustained economic development across the world. It has a huge impact on the nascent industry of cryptocurrencies.
A lot of people invest in cryptocurrency with a view that perhaps they would own it as a correlated asset which may act as a hedge against financial crisis, bitcoins and cryptocurrency were essentially introduced during the recession of 2008, and this one-year pandemic boomed the crypto market.
According to Wavelet cross-correlation, there is an inverse relation between cryptocurrency and covid, but later it shows some positive impact also, uncertainty raised by COVID-19 make Crypto market more volatile and unpredictable as compared to the stock market the demand and supply were also unstable.
In the beginning, due to an immediate flight to liquidity, the price of Bitcoin fell below $4,000 after the S&P Index in the USA saw a sharp decrease, The market share of those cryptocurrencies is around 77% by the end of March 2020, The stock market crash is the most prominent single day market price recession that caused Bitcoin Cash, Ethereum, Bitcoin, and Litecoin to plummet by 43.95%, 43.09%, 37.41%, and 35.53% change in price, respectively. In the beginning, Crypto pricing behaved like a traditional asset, complacency in the market turned into a crisis, which effectuated sell-off across the world, but later on, we can see that the crypto market year to year has outperformed.
The number of infections and deaths in Italy, Spain, the UK, Iran, and France does not affect the stock market returns except for the number of reported cases in China, in China the number of investors in the stock market has been reduced. Bitcoin has touched new heights – crossed $20,000 in Dec 2020, $40,000 in Jan 2021, hit $50,000 in Feb 2021 and is now trading around $54,500 globally.
When Covid exploded, the value of bitcoin was about $7300, but presently the same bitcoin cost more than $46,800, an astonishing 640% rise. Not only bitcoins, but several other cryptocurrencies also rose with the same percentage, Litecoin by 3.20-3.84%, Bitcoin by 2.71-3.27%, Ethereum by 1.43-1.75%, and Bitcoin Cash by 1.34-1.62%. 12.45% change in global daily confirmed cases, and 18.85% change in global daily deaths on March 23, 2020––improved the market price of Bitcoin, Ethereum, Litecoin, and Bitcoin cash by 13.67%, 12.66%, 11.52%, and 11.40%. In contrast, a seeming decline of global daily confirmed cases and deaths to 1.08% and 0.66% on September 03, 2020—plunged Bitcoin Cash, Litecoin, Ethereum, and Bitcoin by 14.14%, 13.57%, 12.79%, and 10.22%, respectively.
Hedge ratios show a $1 long position in Bitcoin can be hedged for 62 cents with a short position in Ethereum. A 41-cent short position in Litecoin can hedge a $1 long position in Bitcoin during the pre-COVID-19 period. A $1 long position in Ethereum can be hedged for 55 cents with a short position in Litecoin during the pre-COVID-19 period.
During the COVID-19 period, a $1 long position in Bitcoin can be hedged for 64 cents with a short position in Ethereum. A 50-cent short position in Litecoin can hedge a $1 long position in Ethereum during the COVID-19 period. Finally, a $1 long position Ethereum can be hedged for 67 cents with a short position in Litecoin during the COVID-19 period. Analysts believe that if the trend continues, Bitcoin might hit $100k by the end of 2021.
Cryptocurrencies offer a range of potential benefits to emerging economies. A lot of people also donate funds through bitcoins. Pandemic influences several investors to invest their money in cryptocurrency as these crises may result in government interference which can be risky. A lot of people lost their jobs so to fulfill their needs they found the crypto market as an alternative to earning money.
Like every coin has two sides somehow it also gives rise to crimes too. During pandemic fraud, cyber fusillades, more criminals choose to buy Crypto virtual weapons and get paid after successful attacks. Several sophisticated investors manipulate the price of cryptocurrencies, numerous criminals also exist there who might stop using cryptocurrency.
Due to the lockdown phase, it is risky to go out physically and buy essentials, cryptocurrencies help individuals to pay online and take the privilege of online services; it would also assist to maintain social distancing.
Many big businessmen and investors also invest their money in bitcoins and crypto Markets and say that cryptocurrencies bring about a revolution in the financial sector. Bill Gates, John McAfee find them optimistic and productive, but Elon Musk sees it as a source of environmental degradation, conflict of thoughts is present even in the business tycoons.
The above discussion shows the hedging role of cryptocurrencies against the uncertainty raised by COVID-19. Sometimes it shows some negative aspects, sometimes positive. Coronavirus brings about a fall in income and investment and gives rise to the risk in the stock market. From the point of view of some people, it may be profitable to invest in cryptocurrencies. Somehow it also helps to cope with the drastic situation of covid-19.
Several institutional investors like Microstrategy, Tesla, Square Corp, etc., resorted their cash reserves into Bitcoin. Pros and cons both are present. Bitcoin jumps to a three-year high as the Covid crisis changes investor outlook.