Coronavirus and Rising Bitcoin Prices – Pure Coincidence?
January 2020 was Bitcoin’s best month since 2013, and analysts are looking at the outbreak of the coronavirus for an explanation. Is there a connection?
With a closing price of $9,335, the leading cryptocurrency gained more than 29% since the beginning of the year. The outbreak of the coronavirus is said to have pushed the price of Bitcoin. Forbes even writes that Bitcoin could “explode” due to the spread of the virus.
The argument is well-known: Bitcoin may serve as a safe haven asset in times of global uncertainty. The outbreak of the virus has already had negative consequences for the Chinese economy, which is why the Shanghai Composite Index also lost in value last month. Bitcoin can protect investors from these losses.
Bitcoin as a safe haven?
Nigel Green, CEO of the consulting firm deVere Group, argues the recent Bitcoin rally was correlated with the increasing spread of the coronavirus. “The more individual cases that are identified, the more countries around the world that are affected, and the greater the impact on traditional financial markets, the higher the price of bitcoin has jumped,” says Green.
The argument makes sense. Rising Bitcoin prices also accompanied the US-Iran crisis in early January. And even though Bitcoin is not a classic safe-haven asset because of its high volatility, it can function as a crisis hedge, as the price is uncorrelated with other asset classes. Thus, if investors lose money with stocks or other assets, Bitcoin may compensate for these losses, at least partly.
Coronavirus was not the sole price driver
But analysts looking at China to explain Bitcoin’s January movements may also look at the end of the Chinese New Year. During the entire New Year’s week, billions of dollars were parked on the sideline. As soon as the festivities were over, the trading volumes picked up again.
Additionally, there are technical price drivers: The Bitcoin Mining Difficulty was downgraded in December for the first time in twelve months, suggesting that there were fewer miners and therefore less supply. A downgrade of the Mining Difficulty typically indicates the end of a bear market. Also, the Bitcoin halving due in May is now approaching fast. As the mining premium will be cut in half, additional supply will decrease.
Looking at the overall picture, the outbreak of the coronavirus may well have had an impact on the price of Bitcoin, but the effect seems exaggerated. Instead, there was a whole series of price drivers which together led to a terrific start into the new year.