As the spread of coronavirus truly caught hold of the West, central banks and governments from the US to the UK announced wave after wave of measures to try and combat the negative effects of Covid-19 on their economies. The consequences of these measure have been felt across markets, and the crypto market is no exception. Let’s take a look at how the coronavirus crisis is affecting crypto so far.
Have cryptoasset prices come down too much?
At one point during last week bitcoin fell to its lowest point in almost a year at around $3.5k. By Friday it was back up $6.8k, and now it’s retraced its steps and fallen back down to $5.8k. So what’s been going on?
There has been a big influx of users onto the eToro platform, with investors looking at a range of asset classes, focussing on equities, commodities and indices. From the conversations I have been having, many people have been investing any spare cash, recognising that the low prices we are seeing for many cryptoassets do not match their fundamentals. The price for bitcoin, for example, does not reflect even the lower echelons shown in the majority of price modeling analyses.
In my view cryptoassets on the whole are being undervalued. Given the significant falls we have seen recently, I would not be surprised to see bitcoin bounce back even further with a solid jump in performance.
Speculators are returning
It seems many of the big investors are thinking the same. Online transaction reporting bot Whale Bot (@whale_alert), which tracks large transactions across the crypto marketreported over $120m of the USD stablecoin Tether (USDT), being minted last week. This suggests people are now moving large amounts of money into fiat-tied stablecoins and then using them to buy other cryptoassets. This could be part of the reason why we saw cryptoassets pick up towards the end of last week.
The $120m in USDT is also a massive percentage of the current liquidity, so any movements here has the potential to significantly influence the price of bitcoin and other cryptoassets.
Prices go down, but don’t get caught up in the misery
I’d also like to make this point: the current price movements are not all doom and gloom. It’s easy to forget how far we have come. The prices we see now are only low in the context of where the price of bitcoin has stabilised in the past 12 months. It was not that long ago that bitcoin sat at the $3,000 mark (Dec 2018 – Mar 2019), or $2,000 (May – Jul 2017), or even, going back to early 2017, $500 per bitcoin. Much has been said about how far bitcoin has fallen recently, but this is comparing it with how exceptionally well the coin has performed since its inception.
What can be said about many cryptoasset investors, backed up by what we see on the platform, is that arguably many people adopt a buy and hold (HODL) mentality. Perhaps investors in traditional markets could learn a thing or two from crypto holders about long term investment and not panic sell at the first sign of price volatility. For example, if someone were to invest in an equity index and then sell at the first sign of trouble, they could be regarded as an impatient or speculative investor. It cannot be stressed enough that cryptoassets are long term investment opportunities, as well as being innovations that offer real world applications and solutions.
Bitcoin Lightning upgrade not the shock that bitcoin needs
There has been a lot of commentary about the bitcoin Lightning upgrade. Whilst it’s a great upgrade opportunity, and needs to be done, I think people regarding it as a panacea for bitcoin’s ills are misguided. Yes, bitcoin has a scalability issue, but its other issues are more pressing. There is an issue with volatility. There is an issue with regulation. What we would like to see is for exchanges to join forces, helping to reduce liquidity fragmentation, which could help to reduce volatility in the market.
If exchanges are able to solve this issue by somehow pooling liquidity, it would represent a solution for both investors and for regulators, boosting the viability of bitcoin and other cryptoassets as a legitimate asset class. Once these cryptoassets see a reduction in volatility and the seal of approval from global financial regulators, then we can look at enhancing and improving the scalability through the Lightning upgrade.
Comments by Simon Peters, Market Analyst at eToro