For the past two years in my work-from-home stint, news around the Bitcoin has time and again caught my attention. When I look at the way the price of Bitcoin has moved over the last twelve months, I wonder — is the pandemic and the millions of people sitting at home the real reason behind the Bitcoin boom?
The pandemic has, in a way, increased our appetite for quickly doubling our wealth. And these desires have attracted many towards the ‘bold’ Bitcoin and the world of digital currencies.
In a race to adapt to the ‘new normal’, we are taking all our decisions online. From financial consultations to online investment advice, there has been a drastic surge witnessed in everything online. People have realized the enormous shift the world has made during the pandemic phase and have adapted/are adapting to a futuristic lifestyle.
COVID-19 & Cryptocurrency
Let us look back at what was happening when the deadly coronavirus suddenly entered our lives. The initial shock of the COVID-19 pandemic shook the world and all the asset classes severely suffered.
The severe liquidity crisis was behind it all. Even the world of cryptocurrency was under tremendous pressure and witnessed a drastic fall. Crypto stocks fell more than the other markets, but still came out to be the top performing asset class last year. What caused this sudden surge?
Frankfurt School of Finance and Management recently published a report that shows that allocating one to five per cent crypto assets to a conventional portfolio generated additional returns. It also severely increased the Sharpe ratio, a well-known risk-to-return measure. So, cryptocurrency is being seen as a perfect portfolio diversifier owing to its low linkage to other traditional and alternative asset classes.
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The desires to diversify portfolios with crypto assets like Bitcoin multiplied when big companies like Tesla Inc (NASDAQ:TESLA) started investing in cryptocurrencies. Not just this, we also saw billionaires like Elon Musk vouching for the world of cryptocurrencies.
The mainstream support to cryptocurrencies by big corporations led to surge in the asset prices as investors started rushing towards it to make big money. But time and again, the volatility of major crypto assets has been a cause of concern and a major reason why most investors still shy away from it. The way a single person like Elon Musk can influence Bitcoin, Doge and the crypto market as a whole is disliked by many. Not just that, Bitcoin has also been something that is demanded in ransomware attacks. So, somewhere these links are making investors stay away from the crypto market or invest with caution in the same.
Nonetheless, the spare time we got during the lockdown and increased reliance on the digital world did attract investor attention to digital assets. The price of Bitcoin rose six times from about US$ 13,500 last June to more than US$ 81,500 in April 2021. It has since settled back to about US$ 50,000 and is continuing with its news-based volatile movements. So, call it the fear of missing out (FOMO) or the pandemic-led boredom, the crypto world has entered an hyper-active mode due to sudden surge in investor interest.
The above constitutes a preliminary view and any interest in stocks should be evaluated further from investment point of view.