Cryptocurrency was touted as a 'safe haven' for investors looking to stockpile some cash from plummeting financial markets. However, cryptocurrencies, like Bitcoin, have crashed along with everything else during the COVID-19 pandemic.
Dr John Vaz, from Monash University's Department of Banking and Finance, charted the Bitcoin price using a weekly index of 100 commencing three years ago, and contrasts that against the value of the Australian All Ordinaries Index and the S&P 500 Index in the USA.
"Based on the promises of advocates, cryptocurrencies shouldn't move with conventional financial markets. However, on the contrary, during crises we see that they do," Dr Vaz said.
"Cryptocurrencies don't currently provide you with financial protection, as opposed to fiat-based (money-based) assets such as bonds or valuable commodities, like gold."
The global pandemic has wiped billions of dollars off the cryptocurrency market, as it has for stockmarkets, with Bitcoin plunging to just over $4000 per unit in mid-March, down from $10,100 per unit a month earlier. Seychelles-based BitMEX had $750 million liquidated in a matter of minutes.
Ironically, cryptocurrencies such as Bitcoin and Ethereum - new forms of digital money combined with a payment mechanism - were created as alternatives to government-issued currencies, and have grown in popularity following the global financial crisis of 2008.
While cryptocurrencies are thought to exist outside state monetary systems and are not regulated by national governments, they can be exchanged for fiat currencies – that is, money – on digital markets.
Cryptocurrency advocates liken Bitcoin and its variants to gold in that they have a limited finite money supply. But, Dr Vaz said suggestions that cryptocurrency is a hedge that would resist volatile sharemarket fluctuations caused by the COVID-19 pandemic aren't true.
"It's no coincidence that the first cryptocurrency was called Bitcoin, using semiotics and imagery of gold coins to give off the impression that it's tangible and trustworthy," Dr Vaz, who researches cryptocurrencies and their influence on financial markets, said.
"Cryptocurrency is nowhere near as stable as gold over time – a commodity that Bitcoin has tried to emulate in a virtual sense."
Although cryptocurrencies are not proving to be as immune to markets as they make themselves out to be, Dr Vaz said they're still likely to play a role once the current crisis passes, depending on how governments manage the effects of their dramatic growth in spending in fiat-based currencies, related financial markets and the real economy.
"Bitcoin definitely has a place post-crisis if governments make a mess of the fiscal and monetary policy. If people don't trust traditional money, this could be the Armageddon of fiat currency and Bitcoin will be seen as more reliable. It's all about trust," Dr Vaz said.
Dr Vaz says consumers and investors who, post-crisis, may lose confidence in the Australian dollar if there is high inflation as a result of monetary expansion, could resort to currency substitution, such as the US dollar, to preserve their buying power.
Risk Warning: Cryptocurrency is a unregulated virtual notoriously volatile instrument with a high level of risk. Any news, opinions, research, data, or other information contained within this website is provided for news reporting purposes as general market commentary and does not constitute investment or trading advice.
