During the market meltdown that started about 10 days ago, crypto-assets crashed the most. With Bitcoin going as low as $3500 from the high of $8000 in a single day posting the largest value drop since inception, everyone wondered what is Bitcoin?
People didn’t expect this drop to happen. Here’s Brian, CEO of Coinbase, tweet about this
People wondered if Bitcoin isn’t currency (volatile), or store of value (posting massive losses in value), and it’s also not uncorrelated with stock markets or other assets, then what is it?
Personally, it made me wonder that too. If it can’t even act as an hedge against the other markets, what is it? This drop affected my confidence in this asset-class. However, only a week later, my confidence picked up, at least by a bit.
During the first 3-4 days of the meltdown, I started to see that gold is losing value too. What is often seen as the safe haven during financial turmoil, was losing value too. The oil markets crashed as well, although that likely happened for a different reason, but it did. There was pretty much nothing that didn’t lose value.
What I concluded in the end is that during a financial crisis like that, people sell everything to move to cash. It doesn’t matter what asset class. It doesn’t matter what safe haven. All assets are sold so people can sit on cash and take their time to understand what’s happening before figuring out what to do next.
In the next week, I saw crypto-assets and Bitcoin rebound by a lot. It is trading above $6500 at the time of this writing. It is still below where it dropped from, but has recovered by a lot. Meanwhile, the stock market hasn’t recovered at all. The S&P 500 index for example is still down by 30%. What I’ve concluded from that is while all assets are correlated at the time of turmoil, only 10 days later, I can see crypto-assets moving in a different direction. I feel that in the coming weeks and months this uncorrelation will be very well established.
And that would be the first real world test that this asset-class would pass.