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COVID-19 Is the Risk You Didn’t See Coming; Rethinking Safe-Haven Assets in a Post-COVID-19 World

COVID-19 was officially declared a pandemic on Wednesday, March 11 and the declaration coincided with the official start of the bear market with equity indexes crashing more than 20% from their February highs. More accurately, the stock market transitioned from a record high to descend into a bear market in just 19 days. Of course, we told you all about this on February 27th when the S&P 500 Index was trading around the level in an article titled “Recession is Imminent: We Need A Travel Ban NOW”.

According to Ryan Detrick, an analyst with LPL Financial in a chat with Fortune,we’ve never seen [the Dow] go from an all-time high to a bear market this fast” since the index’s inception in 1896… As the shock occurred and shut everything down, the resurgence of turning everything on is going to have a classic V-shape, so we’re on the downswing right now.”

Here’s how the stock market has fared so far

The chart below shows how major U.S. tech stocks have fared in the year-to-date period. The stocks started with wins straight out of the gate to start Q1 2020 on a positive note but the momentum didn’t last through the second month of the year. By the end of the quarter, Alphabet Inc.(NASDAQ: GOOG) was down 17.89%, Apple Inc. (NASDAQ: AAPL) was down 17.79%, and Microsoft Corporation (NASDAQ: MSFT)was down 2.45% while Amazon.com Inc. (NASDAQ: AMZN) managed to recover from the decline to score 3.18% gains.

The reason for the marginal decline in Microsoft and the slight gain in Amazon has been attributed to the increase in the use of the former’s solutions in working from home and the fact that the latter manages e-commerce for essential goods.

Interestingly, the market crash wasn’t limited to equities as the prices of different commodities also crashed steeply during the period. As seen in the chart below, the price of Brent crude and West Texas Intermediate has declined by 16.49% and 15.46% respectively in response to reduced demand for oil as the global economy remains in lockdown. Commodities in the agricultural value chain seem to be the worst hit; as the S&P GSCI Live cattle index records a massive decline of more than 35% in the same period.

Cryptocurrencies: Correlation or No Correlation to Equities?

In the last decade that Bitcoin and other cryptocurrencies debuted on the global economic and financial scene, one of the loudest arguments in its support is the assumption that they could be safe-haven assets on par with (or better than) gold in times of economic uncertainty. For one, Bitcoin has a fixed supply at 21 million coins unlike fiat – the stimulus package that the U.S fed recently approved makes a solid case.

However, while the theory supports the safe-haven perception of Bitcoin, the practical truth is that Bitcoin has never been through a global market crash or economic recessions. Hence, nobody has any empirical data on how it will perform during a recession and certainly not over extended periods — until now, that is.

Between March 12 and March 1, barely 24 hours after U.S. equities officially crashed into a bear market, Bitcoin also crashed through the non-correlation theory after dropping almost 50% from  $7,690 to $4,121.

The fact that Bitcoin has a 65% dominance in the cryptocurrency market also triggered a market-wide crash that saw many tokens recording double-digit losses. As of March 12, the cryptocurrency market saw more than $93 billion wiped away from its value and many crypto traders and investors recorded steep losses.

Interestingly, users of Pokket, a cryptocurrency fixed deposit service, were largely insulated from the crash that ravaged both the equities and crypto market. Whereas most crypto investors are forced to trade actively or buy and hold in the hopes of future profit, Pokket is creating new financial instruments that allow crypto holders to earn returns on their crypto assets while holding them in much the same way that you earn returns on the traditional savings account or fixed deposits on fiat currencies.

During the week that equities entered a bear market and that Bitcoin lost almost half of its value, Pokket users were unfazed and they continued to earn interest ranging from 0.6% to 250% depending on the asset you own out of the 33 cryptocurrencies for which they have structured financial products. Unlike traditional savings accounts, you only need to hold your crypto for one week to earn the returns. In addition, all assets held with Pokket are 110% collateralized for extra security.

What does a post-COVID-19 world hold for stock and equities?

If not for the timely intervention of central banks in the major world markets, the global stock market would have crashed into a depression in response to the unprecedented nature of Coronavirus. However, cryptocurrencies have displayed incredible resilience with Bitcoin climbing 31% while the S&P 500 has only managed to recover by 7%.

Hence, there’ll continue to be room for digital assets on Wall Street even though the traditional gatekeepers are still sceptical about legitimizing cryptocurrencies. New players such as Change will continue to blur the lines between traditional assets and digital assets by providing simple retail solutions for investing in cryptocurrencies and for real-time payments that connect cryptocurrencies to the rest of the modern world.

Irrespective of whether you think cryptocurrencies have a place in the post-COVID-19 portfolio or not, you should note that the risk of a negative feedback loop still looms over the world. The fears of a global recession might trigger a market selloff, the selloff could cause financial institutions to tighten borrowing conditions, which in turn makes it harder for businesses to finances. Hopefully, leaders will be able to develop a coordinated response to save the global economy.

The COVID-19 pandemic has triggered an unprecedented global change across economics, healthcare, international relations, and socio-political lines. No one has any idea of how long it will take for the world to return to a semblance of normalcy. That said, traders and investors in both traditional and digital assets will continue to look for opportunities to profit while actively identifying and mitigating risk factors.

Disclosure: None.

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