The panic of the Coronavirus outbreak led to a great deal of uncertainty in almost every aspect of life. Unfortunately, the global crisis did not go easy on financial markets as almost every country experienced both an economic and liquidity crisis. Investors were desperate and began converting their investments into cash so they had a form of security and could safeguard their finances.
To make matters even worse, the crypto market struggled to hold its own against the deadly virus as Bitcoin, and alternative digital coin prices collapsed along with other financial market sectors. It has been almost a year, and cryptocurrencies seem to be performing well once again. What happened to the crypto world during the pandemic?
Coronavirus has affected almost every aspect of life in multiple ways. What about the impact on the crypto market? After one year of the pandemic, recent crypto updates appear to be positive. If you look at Bitcoin, for example, it has increased by over 640% since the start of the pandemic. Alternative popular cryptocurrencies, such as Ethereum, also show similar growth rates. From a theoretical standpoint, this upward trend is not entirely obvious as various factors drive the demand up or down during a time of crisis.
The Highlighted Need for Digital Financial Markets
During any pandemic, one collection of factors could lead to increased demand for cryptocurrencies. The fact that people can exchange cryptocurrency from anywhere in the world helps to eliminate some of the liquidity issues that may occur if local governments impose trading restrictions as part of a lockout.
As a consequence, when you compare cryptocurrency price history to alternatives, they become more appealing. Furthermore, investors who are concerned that a crisis could prompt political influences, institutions, or banks to intervene in the market may choose to invest in the decentralized crypto economy. To put it simply, the fact that cryptocurrencies function automatically and are not controlled by a central organization means that they appear more appealing as they allow potential investors to avoid some of the political risks associated with financial activity.
Contrary, countervailing powers, on the other hand, may reduce demand. During times of a crisis, cryptocurrencies may become highly correlated with conventional financial markets, despite the fact that this does not normally happen, making the advantage of switching to crypto insignificant. To make it worse, the confusion created by a pandemic could result in at least two dangerous behaviors that could result in significant losses. Additionally, sophisticated investors can manipulate the value of cryptocurrencies by artificially inflating the demand to attract uninformed investors, who may then sell their investments once the price has risen sufficiently.
This idea seems possible if individuals engage in herding activity, that is, buying cryptocurrencies simply because others are doing it. Secondly, cryptocurrencies were accused of encouraging illegal activity long before the pandemic. As a result, the same characteristics that render cryptocurrencies appealing during a crisis often make them appealing to criminals, especially if crime is more tempting during the chaos of the Covid-19 pandemic. Individuals may be afraid that using cryptocurrency could link them to accusations of money laundering, so as a result, they avoid trading.
Crypto updates make it is evident that this market has thrived during the Covid-19 pandemic, implying that the initial set of results has won out in the long run. However, much of the mystery surrounding the Coronavirus has been dispelled, due to advances in medical care and the development of vaccines.
Studies Regarding the Impact of Covid-19 on the Crypto Economy
It is less clear how investors reacted when there was still a great deal of uncertainty. Studies were conducted on how the trading volume and market capitalization of the top 100 cryptocurrencies are associated with the number of Coronavirus cases globally during the early days of the pandemic. Several fascinating results emerged from the investigation. Firstly, analysts discovered a connection between the number of new Coronavirus cases and the market capitalization of cryptocurrencies, indicating a possible upward trend in the financial market.
Secondly, the research shows that the relationship between cryptocurrency investments and the spread of the virus had a U-shaped form. Hence, the more Covid-19 cases led to increased crypto market investments initially, but then the impact temporarily reversed.
Why did this reversal occur? It is likely that individuals initially panicked and withdrew from conventional markets, only to return after the scope of the pandemic became clearer. Due to the advantages of cryptocurrencies, such actions may be reasonable in the risk-hedging context. However, this finding is likely the product of either quick money-making schemes or a brief burst of illegal conduct.
As a result, the regulatory structure is complicated. If the results represent rational behavior, the implications of that behavior should be the priority. The studies revealed a positive correlation between cryptocurrencies and the stock markets, implying that funds drawn from the stock exchange would not be recovered in crypto markets.
This raises questions about the systemic risk since the crypto economy seems to move in unison with conventional markets during times of global crisis. As the crypto market continues to constantly gain traction, these issues are only growing.
If the impact is due to illegal activity or quick money-making schemes, regulation appears to be much more essential. The U-Inverse relationship that analysts discovered also implies that the legislation is time-sensitive, implying that what is beneficial at one time can be useless or destructive at a later stage.
The Recovery of Cryptocurrency
While Bitcoin, for example, fell by more than half its price at the start of the pandemic, it managed to recover to the highest price it has ever been. How? The recovery of Bitcoin alone displays the market resilience of cryptocurrencies.
Many people have previously preached about how these forms of digital currencies have no relation to any other classes of assets; however, this can only be highlighted positively when individuals take a look at how cryptocurrencies outperformed alternative traditional and mainstream assets governed by a centralized system.
It has always been emphasized how crypto volume changes have the potential to transform the entire financial market. People know it; however, the global pandemic has only highlighted this factor. Fortunately, the Coronavirus outbreak encouraged multiple countries to act faster in establishing set regulations and determining compliance requirements regarding cryptocurrencies. Another factor that is evident due to the pandemic is that altcoins and Bitcoin now have real value in the world we live in. It is not something for people to speculate over anymore; it is a fact, and the evidence exists!
The Final Verdict
Cryptocurrency and Coronavirus make for a thought-provoking topic of conversation. Early March 2020 signified a disastrous event for the major international markets as Coronavirus took over the world. The stock market, for one, saw its most dramatic and fastest fall in history since 1929. Unfortunately, the crypto economy initially fell; however, it managed to bounce back better than ever.
It is evident that the Coronavirus had a significant impact on the cryptocurrency investing world. The effect did not occur in a set form, as on certain days, the market grew while it fell on other days. However, this is not only a result of the pandemic; the usual volatile and risky nature of the crypto market only added to the uncertainty during the global pandemic.
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