Researchers Claim Cryptocurrencies can be a Useful Tool During the Spread of Coronavirus; Reiterates on Stricter Regulations for Smooth Functioning

The spread of the coronavirus has not only tanked the economy but has also affected the spirits of hundreds of millions of people worldwide. Despite the progress of each day, the number of confirmed cases has only gone up with testing rates staying at a dismal level.

During this time, researchers at the Tel Aviv University Law School and the University of Hamburg conducted a test to predict how the cryptocurrency market would be affected by the pandemic. Hadar Jabotinsky and Roee Sarel wanted to analyze how the stepbrother of the mainstream market is coping with coronavirus. 

The researchers expressed their views in the latest paper titledHow Crisis Affects Crypto: Coronavirus as a Test Case‘. In the paper, the researchers went through the market cap and trading volume of the top 100 cryptocurrencies and compared their performance with the ebb and flow of the coronavirus. One of the aims of the publication was to check if digital assets could act as the right alternative to fiat currency during a time of crisis.

Coronavirus cases have topped 2.4 million and at this rate, the number is expected to breach the 3 million mark by the end of this week. An excerpt from the paper read:

“On the one hand, cryptocurrencies are supported by a decentralized mechanism, which is independent of governmental functions and available anywhere in the world. Thus, people may respond to the threat of global instability by switching from traditional currencies to cryptocurrencies. On the other hand, cryptocurrencies may be both tightly related to economic activity and, due to lack of sufficient regulation, subject to manipulations by sophisticated investors, so that they cannot escape the fate of traditional markets.

The researchers discovered that each new Covid-19 case has contributed to an inflow of money into the cryptocurrency market on average during the initial stages of the pandemic, causing tokens to increase in value. Covid-19 cases initially led to higher investment in the cryptomarket, but there was a turning point after which the effect reversed. This u-turn was seen as a major marker in making regulations a strong aspect of the cryptocurrency industry. According to the paper, the u-inverse relationship meant that regulation was time-sensitive.

There were multiple factors that caused the shift in capital flow, but the paper focussed on two major ones. The first was that the market crashes had forced people to hide capital ‘under their mattresses’, a classic panic move. The second was a more inventive and newer method. New age investors who had heard and dealt with digital assets herded their holdings into crypto so that they were not affected by the shift in mainstream financial markets.

The gradual reduction in the capital coming into the crypto market could be assigned to the fact that Bitcoin did not maintain its’ safe haven’ asset tag. In March, Bitcoin had shown bearish signs just like the Dow and Nasdaq. Since then, Bitcoin as recovered slightly to settle above the $7000 mark. At press time, Bitcoin was trading for $6919 with a total market cap of $126.88 billion. A 4 percent fall in price over the previous day had caused the 24-hour market volume to fall to $37.6 billion.

Jabotinsky and Sarel claimed that the latest Cryptocurrency Act of 2020 would serve as a proper benchmark for cryptocurrency regulations in the United States. This ‘heterogenous’ solution included different authorities handling different cryptocurrencies. The two researchers warned holders that a herd market crash in the crypto industry that coincided with a crash in the mainstream market may be a sign of financial systemic risk.