Liam Frost · 2 days ago · 2 min read
The Dow Jones Industrial Average (DJIA) plummeted by 850 points upon opening, as fears towards the coronavirus outbreak hit its peak. Bitcoin also dropped by 3.5 percent on the day and is down by 8 percent in the past 11 days.
Bitcoin is not ready to be a safe haven asset, just yet
When fear strikes the global financial market, investors tend to eliminate the riskiest assets in their portfolio.
For most investors, the asset class with the highest level of risk is single stocks, and Bitcoin fits that category. Throughout the last 12 months, data from multi-billion dollar investment firms like Grayscale have shown a consistent inflow of capital into the bitcoin market from institutional investors.
The Q4 2019 report of Grayscale read:
“Institutional investors, primarily hedge funds, continued to be the primary source of investment capital for 2019 (71%). However, larger investments from high-net-worth individuals added a meaningful $93.2 million of investment in 4Q19.”
But, bitcoin is still too volatile and too small in terms of market capitalization compared to other traditional safe-haven assets like gold. At $177 billion, the total market cap of bitcoin is about 2.21 percent of gold’s market cap.
Bitcoin has likely dropped substantially against the USD in the past two weeks because of the shock that has penetrated into the international equities market and the Dow Jones.
In December 2018, when the bitcoin price fell abruptly from around $6,300 to $3,150, several strategists said that the uncertainty around the trade war could have prompted investors to sell high-risk assets including bitcoin amidst a Dow Jones correction.
BTC could possibly be seeing a similar trend; as the coronavirus outbreak in Italy and South Korea start to freeze up the Asian and European economy, investors are looking to sell the riskiest assets first.
Considering that the bitcoin price is up by around 50 percent year-to-date, the decent price action could sway investors to sell BTC at the height of geopolitical uncertainty.
The situation is getting even direr for the Dow Jones
Italy reported 130 confirmed cases of coronavirus overnight and South Korea is close to reaching 1,000 cases, all stemming from a single cult church that is suspected of having infected at least 400 individuals.
The Dow Jones and the rest of the equities market saw a sharp reaction from traders on the day, but the slump could worsen over time as coronavirus shows no signs of slowing down.
Dr. Gabriel Leung, the dean of medicine at the prestigious Hong Kong University, said that the peak of coronavirus is set to be reached in May.
The coronavirus outbreak rapidly expanding throughout Europe and Asia until May could have a detrimental impact on productivity and business sentiment.
In some regions like China, businesses have started to run short of cash and banks have reportedly been struggling to help businesses in need due to overwhelming demand.