One the most vocal bullish arguments for Bitcoin and other cryptocurrencies is the claim that it is an uncorrelated asset that will help protect investors during periods of market uncertainty and volatility. The past week or so has certainly been a period of market volatility and multiple down days with losses in excess of 5 percent on several of the largest U.S. exchanges, so it would stand to reason that cryptocurrencies would demonstrate this uncorrelation. Peeling back the layers on this question, however, reveals a situation that is most nuanced. During the recent bearish market for equities the price of Bitcoin dropped from $10,351 on Feb. 12, 2020, to levels around $7,900 on March 9, a drop (in percentage terms) that is on par with the decline in equity values during the same approximate period.
So what happened? Why is the most prominent and established cryptocurrency acting more like an equity security rather than the digital gold that is often stated as a more accurate description of what Bitcoin represents? Not meant to be an all-inclusive nor exhaustive listing, these points and factors may be useful when having these conversations with clients and colleagues:
- Bitcoin and other cryptocurrencies rose to prominence alongside one of the largest and longest-running bull markets in U.S. history. With positive sentiment, and capital seeking alternatives to fixed income due to low rates, some specific cryptocurrencies may have obtained richer valuations than they otherwise might have deserved.
- Despite the fact that many crypto proponents advocate Bitcoin as a legitimate version of gold, the custody and control process pertaining to cryptoassets is still evolving. Physical controls, custody and trading patterns around gold are well established, but these items are still developing for cryptocurrencies. This uncertainty adds volatility to trading patterns.
- Even though cryptocurrencies may have been developed and introduced to the marketplace as a legitimate alternative to fiat currencies, the overwhelming number of transactions has not been linked to buying goods and services. Instead, and even though 2020 data indicates adoption is increasing, the pace of adoption continues to inch along rather than sprint forward.
- Last, but not least, is the following simple reality: During times of market uncertainty and especially when margin calls and other dollar denominated bills come due (on top of regular bills), investors and clients alike will need access to dollars to settle these accounts. Regardless of personal associations or beliefs, if cryptocurrencies can be liquidated at a profit to provide the dollars required to settle other accounts and bills, that is what will happen.
This year is already shaping up to be an exciting and potentially volatile year for blockchain and cryptocurrencies, but this is the first time these cryptoassets have to contend with a potential recession and bearish economic sentiment. Whatever the end result, be sure to stay tuned to the NJCPA’s Emerging Technologies Interest Group (ETIG) for up-to-date commentary, analysis and news for everything emerging-technology related.