Analysts across the globe are now evaluating how COVID-19 will necessitate a large-scale re-examination of research into financial market contagion, a realization that has now given rise to an imminent discussion between cryptocurrencies and the traditional equity market.
A recent study titled, “Diversifying with cryptocurrencies during COVID-19,” used various econometric models and calculations, including wavelet coherence, copula principal component analysis, and neural network analyses to understand the impact of COVID-19 on six digital assets, including Bitcoin Futures, alongside 14 equities and the Volatility Index (VIX).
After carrying out the process highlighted above, the study came to the conclusion that the co-movements of the six digital assets (Bitcoin, Ethereum, Litecoin, XRP, Tether, and EOS) and equity indices got ‘progressively larger’ as the impact of the pandemic gathered pace.
The narrative suggested by the aforementioned findings argues against the use of cryptocurrencies as safe-haven assets. Surprisingly, Bitcoin Futures and Tether appeared negatively correlated with equity indices, affirming their value as safe-haven.
Crypto not a ‘safe-haven’: a broken record on loop?
It is not the first time that Bitcoin and the rest of the digital asset market have been criticized for a higher correlation with equities, something that translated during the market collapse in March However, people tend to forget the time crypto rook to recover following the aforementioned crash.
As previously highlighted, it is unfair to associate Bitcoin’s rising safe-haven credentials with its recent correlation with equity because it is yet to have a competitive market cap. A black swan event such as the one in 2020 happens every 100 years and analyzing Bitcoin and digital assets’ safe-haven characteristics based on the time overlapping that event is not constructive evaluation.
Additionally, while Bitcoin Futures and Tether noted a negative correlation, this does not mean that the world’s largest stablecoin is a safe-haven asset. In a literal sense, storing your capital in USD or USDT is more or less the same in the current situation and Tether has developed some interest from users based on other credentials as well, not just as a possible safe-have candidate.
Finally, the derivatives market noted a negative correlation solely because of Bitcoin’s quick recovery. However, here, it is important to remember that Bitcoin Futures are part of the derivatives market, and this market may not always move concurrently to an asset’s individual valuation.