Bitcoin Passed its First Stress Test & Turned Out More Resilient than Other Asset Classes: JPMorgan Report
Bitcoin took its first test and has got “mostly positive” results, according to JPMorgan Chase & Co.
This test was the sell-off in March when the price of bitcoin crashed more than 40% just like many other markets — stock market, bonds, and gold — as economies shut down and investors fled riskier assets in favor of cash due to the coronavirus outbreak.
But bitcoin emerged largely unscathed and the digital currency has already recovered 150% as per the bank’s reports titled “Cryptocurrency takes its first stress test: Digital gold, pyrite, or something in between?”
The fact that cryptocurrencies survived the madness of March suggests its “longevity as an asset class,” wrote strategists at the bank led by Joshua Younger and Nikolaos Panigirtzoglou.
But, they also said, “price action points to their continued use more as a vehicle for speculation than medium of exchange or store of value.” Bitcoin is also looking to be correlated to riskier assets like equities, said the strategists.
Bitcoin is yet again moving in line with the equities market this week after the Federal Reserve announcement about not increasing the interest rate till 2022. The flagship cryptocurrency dropped about 8% while S&P 500 had its worst slump in 12 weeks. Then it started gaining and has rebounded to $9,400 but is still halfway off $20,000 peak.
In its May report, the bank whose CEO Jamie Dimon once called bitcoin “fraud” said that bitcoin’s intrinsic value has effectively doubled.
Bitcoin Stayed Close to its Intrinsic Level
Since bitcoin’s creation in 2008, the March crash was the first stress test experienced by bitcoin. The strategists point out that the relatively nascent existence of the coin was what precluded the stress test from happening.
During the sell-off, bitcoin was volatile but the same was the case for most traditional asset classes as well.
The good thing was, during the March panic, the valuation of bitcoin didn’t diverge much from its intrinsic level, meaning the market value dipped below mining costs only briefly. In other words, during the shock period like in March, traders might rush for the safety or more liquidity of the crypto market but what we saw was most cryptos fell at the same time.
“That suggests that there is little evidence of run dynamics, or even material quality tiering among cryptocurrencies, even during the throws of the crisis in March,” strategists wrote.
As a matter of fact, the market structure of the world’s leading cryptocurrency turned out to be more resilient than those of equities, gold, Treasuries, and currencies, they wrote.
Liquidity which is directly related to volatility was measured for this, when the order book thins, a given transaction could result in a larger price change and vice versa.
Although bitcoin recorded one of the most severe drops in its liquidity around the peak of the crisis, the disruption didn’t last long and it rebounded much faster than any other asset classes.