Bitcoin outperforms equity in Covid-19 crisis

From Jan 1 to June 19, bitcoin’s price surged 32%, while FBM KLCI was down by 5%


THE cryptocurrency market recovered at a greater pace compared to the equity market in the Covid-19 period, but experts are still observing its low correlation to the conventional domestic asset classes.

Bitcoin soared more than 100% from March to June. The leading coin lost half of its value in a two-day plunge to below US$4,000 (RM17,080) on March 12 — when Covid-19 was declared a pandemic by the World Health Organisation.

Bitcoin, which accounts for more than 60% of the market, now ranges around US$9,500 since the end of May.

According to data gathered by that represents some 5,600 digital currencies, the overall market capitalisation of the cryptocurrency market surged by 70% from March to June.

Comparatively, the US’ S&P 500 Index only recovered by 39.2% to 3,133 points last Friday from 2,237 points in March.

Compared to the FTSE Bursa Malaysia KLCI (FBM KLCI), Luno Malaysia Sdn Bhd country manager Aaron Tang said Bitcoin has greatly outperformed the Malaysian stock market benchmark on a year-to-date basis and since the lows it hit in mid-March.

“From a more global perspective, the correlation between bitcoin prices and the US stock market has increased in recent months; ever since the crash in mid-March.

“However, the correlation between bitcoin — a globally traded asset class — and the local stock market appears to be low,” he told The Malaysian Reserve in a recent email.

Bitcoin has outperformed the FBM KLCI in the last six months. From Jan 1 to June 19, bitcoin’s price surged by 32%, while FBM KLCI was down by 5%.

The FBM KLCI recovered by around 24% from March 16 to June 19, while bitcoin doubled its value over the same period.

Tang said more time is needed to observe whether the bitcoin-stock market correlation will return to its usually low levels seen before the recent Covid-19 crisis.

Tokenize Xchange CEO and CTO Hong Qi Yu said bitcoin has been a beneficiary from the improvement in risk appetite among investors.

Hong expects digital assets will remain volatile as investors are worried of a possible second wave of Covid-19 infections.

In the near term, Hong predicts the stock market to trend lower for the rest of 2020 due to weak earnings of companies.

The cryptocurrency industry, he said, is hoping bitcoin, post-halving, will be able to decouple from the equity market and shift its gear from risk-on asset to risk-off asset.

Through its halving on May 11, 2020, analysts forecast bitcoin’s value will surge to beyond US$20,000, when it last traded in December 2017.

Halving is when the pace of new bitcoin supply is cut in half and happens about every four years. In the last halving in July 2016, the price of bitcoin was about US$650 in December of that year.

Bloomberg Intelligence senior commodity strategist Mike McGlone observed the increasingly favourable technical and fundamental underpinnings for bitcoin, but less so for the broader crypto market.

“The same forces buoying gold support bitcoin, yet the supply of the crypto is more constrained. Adoption, by default, is the primary bitcoin metric, and our indicators remain positive,” he said in Bloomberg’s Crypto Outlook Report June 2020 Edition.

McGlone noted that the price of the largest crypto by market capitalisation is mirroring the 2016 return to its previous peak.

That was the last time supply was halved, and the third year after a significant peak.

“Our graphic depicts bitcoin marking time for a third year following the parabolic 2017 rally. After 2014’s 60% decline, by the end of 2016 the crypto matched about the 2013 peak.

“Fast forward four years and the second year after the almost 75% decline in 2018, bitcoin will approach the record high of about US$20,000 this year, in our view, if it follows 2016’s trend,” he stated in the report.

Hong remains neutral, but stays alert for a significant correction in the equity market in the near term.

“I will pay attention to a correction in the equity market. If bitcoin remains unaffected or the price deflects upward, this would suggest bitcoin and the cryptocurrency market has shifted gear from risk-on to risk-off, changing the positive correlation with the equity market to a negative correlation or near-zero correlation,” Hong said.