Given the strong performance of cryptoassets at the start of the year, a correction was always on the cards. Prices have been falling, but saw a dramatic drop over the weekend following another sell-off from the PlusToken pyramid scheme. Bitcoin, Ethereum and XRP currently stand at $7,928, $204 and $0.209 respectively. But is the fallout on the stock markets caused by the coronavirus outbreak also infecting the crypto sector?
The Covid-19 pandemic is what is known as a ‘black swan’ event, an unexpected occurrence which has a major impact, particularly on the stock markets. During such a crisis, investors often look for hedges outside of the traditional markets, with gold usually being the first choice. During recent scares, such as the threat of war in the Middle East earlier in the year, we have seen a flight to cryptoassets like bitcoin. This suggests investors are starting to see cryptoassets as a hedge because they are decentralised and free from government intervention.
It could be that the general downward sentiment of the markets and other commodities, such as oil, has also become a drag on cryptoasset values this time around. However, I remain bullish about bitcoin, with a variety of models, such as Stock-to-Flow, pointing to a solid run over the next 24 months. Halving is set to happen on the 11th May and is likely to trigger a surge in price. Previous halvings have seen a spike in performance and then an extended bull run, although clearly this isn’t guaranteed.
In my view bitcoin will break $20,000 over the next six months. This will be in the short term following the halving, but the subsequent bull run will see bitcoin hit $100,000 by the end of 2021.
China cedes digital currency race to… Sweden?
Many cryptoasset commentators see China as the country most likely to launch its own digital coin first, primarily to challenge the US dollar as the dominant global currency. But now Sweden, a member of the central bank committee set up to discuss the use of CBDCs (Central Bank Digital Coins), has announced plans to pilot an electronic krona. As a country with a history of being proactive with technology, as well as one with an ever-dwindling amount of cash in circulation, from 80bn kroner to 58bn kroner from 2015-2019, it’ll be interesting to see where the project takes them.
India says yes, the UK says be careful
Talking about CBDCs, last week India’s Supreme Court overruled its own central bank’s 2018 decision, to bar banks dealing with cryptoassets. This important move creates a large opportunity for blockchain companies in India as well as more liquidity in the current system.
The Supreme Court decision shows a growing understanding of the importance that digital currencies will play in the future, but it also proves that attempts by central banks to limit or ban them are likely to fail.
So it’s also interesting to see that, here in the UK, the next governor of the Bank of England is not a fan of cryptoassets. In a recent UK parliamentary committee hearing, Andrew Bailey repeated his view that “If you want to buy Bitcoin, be prepared to lose all your money… [Bitcoin] has no intrinsic value.” Whether this signals a toughening of views from the BoE, we will have to wait until after March 17th when Mr Bailey takes over the role from the outgoing Mark Carney.
Comments by Simon Peters, Market Analyst at eToro