How Has COVID-19 Impacted The Major Cryptocurrencies Performed
The spread of COVID-19 has devastated riskier assets, and major cryptocurrencies have fallen in this category. Bitcoin tumbled on March 12, experiencing a 39% decline in one day, which was horrible for price action. Ethereum dropped 43% and XRP dropped 32%, making March 12, the worst single day for cryptocurrency exchange rates in the past decade. Looking forward, it appears that the demand for cryptocurrencies is on the rise. Shoppers are flocking to apps that allow them to pay for merchandise without touching cash. Also, consumers do not even want someone touching their credit cards. As COVID-19 is tackled, investors will continue to look for riskier assets that can outperform in a post coronavirus environment.
Crypto Currencies Correlated to Equities
What has been surprising over the past 3-months is the strong correlation between cryptocurrencies and equities. A correlation coefficient describes how closely one asset moves in tandem with another asset. The term describes a statistical measure that tells you how closely the performance of the assets is versus one another. For example, a correlation of 1, means that two assets have a performance which is perfectly in tandem. If asset A moves 5%, asset B will also move 5%. A correlation of -1, means that two assets move exactly in the opposite direction compared to one another. A correlation coefficient of zero means that the assets that you are measuring do not move in tandem.
Miners Stop Mining
Another issue that occurred when the price of bitcoin and other major cryptocurrencies like Ethereum dropped significantly was that miners stopped mining because they were not profitable. There is research that says that for a miner to be profitable they need a cryptocurrency like bitcoin to be trading above the $7,500 level to break even. The drop in price likely pushed several miners out of business. This would be like the way the decline in the price of oil is hampering the viability of producers that need oil prices to be above $50 per barrel to break even.
Additionally, miners with older equipment that trade ETF is more costly to run would likely need to close shop which would allow miners with more efficient equipment to take their place. This would likely reduce the cost of making a cryptocurrency coin that is mined and reduce the price that is passed on to the next holder of the coin.
The Technicals
For those who study technical analysis, the price action of Bitcoin has been very telling. The exchange rate has rebounded and recouped most of the losses experienced on March 12, 2020. Bitcoin has made its way back to the 50-day moving average which appears to be strong resistance. This moving average is also capping a move that would allow some miners to become profitable. A close above this level would likely target future gains in bitcoin. In the short term, the bitcoin exchange rate is overbought. The fast stochastic, which is a momentum oscillator that measures overbought, and oversold levels are printing a reading of 87, which is above the overbought trigger level of 80 which could foreshadow a correction.
The Bottom Line
The key takeaway is that most of the major cryptocurrencies are closely tied to the movements of equities. The relief rally seen in the equity space has helped buoy the major cryptocurrency rates as these assets appear to be highly correlated. The key for bitcoin will be a close above the 50-day moving average which appears to be strong resistance.
