HomeServicesCompanyInsightsCareersContactE-Banking
Sign up for our newsletter
Receive insights on the current developments at SEBA and stay ahead of the curve with our well-founded in house research papers.
First name
Last name
Email address
Continue
Economic and financial situationCrypto-market situationConclusion
Friday, 13 March, 2020
Market update

Market update: Coronavirus

Abstract

As the coronavirus disease spreads, economies slow and global financial market sold off. Bitcoin price has dropped substantially.

We think the significant price drop is due to a combination of factors. In our view, the most important is that the crypto-market is dominated by retail investors, some of them with leveraged positions. The drop in price caught many of them off guard and forced them to sell.

The bitcoin value proposition remains intact and the blockchain technology underlying the crypto-currency proved solid. As diseases are temporary by nature, all assets that were hit are likely to recover ultimately. Finally, bitcoin halving is to take place in May this year and will likely support the price.

Economic and financial situation

The coronavirus1 has spread rapidly and broadly around the globe. At the time of writing, more than 130 thousands people are infected in cl 126 countries. Death toll is reaching 5000 people.

To limit contagion, various measures have been taken. Schools have been closed, large people gathering have been forbidden leading to cancellations of festivals and sport events, cities, and even countries have been quarantined. President Trump has decreed a 30-day ban on travel from more than two dozen European countries to the US.

We welcome all these measures that are set to curb the exponential spread of the coronavirus. While it is too early to evaluate their success, they have negatively impacted economies and financial markets.

According to the Purchasing Manager Index (PMI), an economic indicator used to gauge economic activity, the Chinese economy experienced a sudden halt. The index dropped from a healthy 51.1 in January to 40.3 in February, the lowest recorded level since the beginning of this survey in 2004. The level of 50 marks the limit between expansion and recession.

Other economies have not been impacted as negatively as China so far according to the PMIs. It is no surprise that the next release will indicate a worsening of the global economic outlook.

In line with these developments, asset prices have moved significantly. Crude oil price halved since the beginning of the year to roughly USD 30 per barrel, the Volatility Index (VIX) reached almost 70, a level not seen since the Global Financial Crisis, the S&P 500 entered into a bear market with the biggest daily loss since Black Monday, and corporate spreads for both investment grade and high yield bonds have exploded. The magnitude and the speed of these movements illustrate the severity of the crisis.

Risky assets have been hit hard. What about safe assets? At USD 1570 an ounce, gold remained broadly unaffected by the coronavirus. US treasuries on the other hand performed strongly. The benchmark 10 year Treasury yield moved by 100 basis points (bps) to a historical low of 0.6% in the wake of the unexpected Federal Reserve 50bps rate cuts before increasing again thereafter.

In the meantime, bitcoin, which is often perceived as a hedge against adverse developments dropped from USD10,400 mid-February to USD 5800 at the time a writing, a drop of approximately 50%.

Crypto-market situation

Did bitcoin fail to deliver what it promised?

Bitcoin and more generally, crypto-currencies, are a new form of asset class as their determinantsdeterminantslink1 are not those used to value traditional assets. Bitcoin, to mention the most prominent one, is a decentralised and censorship resistant store of value and means of payment. It is thus closer to gold than to government bonds.

Gold and government bonds, both risk-free assets, did not behave similarly in the wake of the coronavirus. Gold price has remained broadly unchanged while US government bond price have increased massively. The reason for these two different behaviours is that they are not risk-free in the same way.

Gold is a safe asset that protects against monetary depreciation, whether domestic (inflation) or international (currency depreciation) and loss of confidence in institutions. This is the case because it is “outside money”, i.e. a form of money that cannot be manipulated by governments and central banks. It is also an international unit of value that is acknowledged worldwide, wherever you go, gold has value.

US government bonds are safe assets as they provide liquidity to the global financial system. Liquidity is what financial intermediaries, companies and households need when asset prices plummet and the economy is hit negatively. This is the reason why US government bonds have been in high demand and why the European Central Bank is providing additional liquidity facilities to financial institutions so that they can then provide it to the real economy.

Bitcoin is closer to gold than to government bonds. As confidence in institutions is high, people do what government say and investors trust central banks. There is no need for outside money. However there is need for liquidity.

Secondly, there is evidence that retail leveraged positions have been closed due to the bitcoin price collapse, adding further downward pressure on bitcoin.

Thirdly, institutional investors categorise crypto-currencies as alternative investment, a high risk pocket. It is clear that in the case of asset price and liquidity shock, crypto-currencies are sold as any other non-core risky asset.

Finally, the crypto-currency market is small. Bitcoin market cap is slightly more than $100bn, while gold is $7.5tn and US government debt (notes, bills and bonds) is about $20tn! As the depth of the crypto-currency market is small, so is liquidity

Conclusion

The sudden and broad spread of the coronavirus has surprised everyone. Policy makers try to limit the contagion. In the meantime, economic activity dropped and financial market acted accordingly. As far as bitcoin is concerned, it experienced its first crisis and revealed its true nature. As digital outside money, bitcoin is a new asset class in a small market with limited liquidity. As we see the current financial shock as a liquidity shock primarily, bitcoin and gold are not assets designed to protect against that risk.


1or covid-19.
Download pdf
Share:
Subscribe to the research newsletter and get weekly updates about the latest articles of SEBAresearch
Subscribe to newsletter

Authors


Yves Longchamp
Head of Research
SEBA Bank AG
in
research@seba.swiss | Disclaimer

Disclaimer

This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is published solely for information purposes; it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial investment or to participate in any particular investment strategy. This document is for distribution only under such circumstances as may be permitted by applicable law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction.

No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this document, except with respect to information concerning SEBA. The information is not intended to be a complete statement or summary of the financial investments, markets or developments referred to in the document. SEBA does not undertake to update or keep current the information. Any statements contained in this document attributed to a third party represent SEBA's interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party.

Any prices stated in this document are for information purposes only and do not represent valuations for individual investments. There is no representation that any transaction can or could have been effected at those prices, and any prices do not necessarily reflect SEBA’s internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions by SEBA or any other source may yield substantially different results.

Nothing in this document constitutes a representation that any investment strategy or investment is suitable or appropriate to an investor’s individual circumstances or otherwise constitutes a personal recommendation. Investments involve risks, and investors should exercise prudence and their own judgment in making their investment decisions. Financial investments described in the document may not be eligible for sale in all jurisdictions or to certain categories of investors. Certain services and products are subject to legal restrictions and cannot be offered on an unrestricted basis to certain investors. Recipients are therefore asked to consult the restrictions relating to investments, products or services for further information. Furthermore, recipients may consult their legal/tax advisors should they require any clarifications. SEBA and any of its directors or employees may be entitled at any time to hold long or short positions in investments, carry out transactions involving relevant investments in the capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment itself or to/for any company commercially or financially affiliated to such investment.

At any time, investment decisions (including whether to buy, sell or hold investments) made by SEBA and its employees may differ from or be contrary to the opinions expressed in SEBA research publications.

Some investments may not be readily realizable since the market is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. Investing in digital assets including cryptocurrencies as well as in futures and options is not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may under certain circumstances occur. The value of any investment or income may go down as well as up, and investors may not get back the full amount invested. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. Tax treatment depends on the individual circumstances and may be subject to change in the future.

SEBA does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific investor’s circumstances and needs. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of individual investors and we would recommend that you take financial and/or tax advice as to the implications (including tax) prior to investing. Neither SEBA nor any of its directors, employees or agents accepts any liability for any loss (including investment loss) or damage arising out of the use of all or any of the Information provided in the document.

This document may not be reproduced or copies circulated without prior authority of SEBA. Unless otherwise agreed in writing SEBA expressly prohibits the distribution and transfer of this document to third parties for any reason. SEBA accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this document.

Research will initiate, update and cease coverage solely at the discretion of SEBA. The information contained in this document is based on numerous assumptions. Different assumptions could result in materially different results. SEBA may use research input provided by analysts employed by its affiliate B&B Analytics Private Limited, Mumbai. The analyst(s) responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting market information The compensation of the analyst who prepared this document is determined exclusively by SEBA.

Austria: SEBA is not licensed to conduct banking and financial activities in Austria nor is SEBA supervised by the Austrian Financial Market Authority (Finanzmarktaufsicht), to which this document has not been submitted for approval. France: SEBA is not licensed to conduct banking and financial activities in France nor is SEBA supervised by French banking and financial authorities. Italy: SEBA is not licensed to conduct banking and financial activities in Italy nor is SEBA supervised by the Bank of Italy (Banca d’Italia) and the Italian Financial Markets Supervisory Authority (CONSOB - Commissione Nazionale per le Società e la Borsa), to which this document has not been submitted for approval. Germany: SEBA is not licensed to conduct banking and financial activities in Germany nor is SEBA supervised by the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), to which this document has not been submitted for approval. Hong-Kong: SEBA is not licensed to conduct banking and financial activities in Hong-Kong nor is SEBA supervised by banking and financial authorities in Hong-Kong, to which this document has not been submitted for approval. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Hong-Kong where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not “professional investors” within the meaning of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules made thereunder (the “SFO”). Netherlands: This publication has been produced by SEBA, which is not authorised to provide regulated services in the Netherlands. Portugal: SEBA is not licensed to conduct banking and financial activities in Portugal nor is SEBA supervised by the Portuguese regulators Bank of Portugal “Banco de Portugal” and Portuguese Securities Exchange Commission “Comissao do Mercado de Valores Mobiliarios”. Singapore: SEBA is not licensed to conduct banking and financial activities in SIngapore nor is SEBA supervised by banking and financial authorities in Singapore, to which this document has not been submitted for approval. This document was provided to you as a result of a request received by SEBA from you and/or persons entitled to make the request on your behalf. Should you have received the document erroneously, SEBA asks that you kindly destroy/delete it and inform SEBA immediately. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Singapore where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not accredited investors, expert investors or institutional investors as defined in section 4A of the Securities and Futures Act (Cap. 289 of Singapore) (“SFA”). UK: This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product.

SEBA is not an authorised person for purposes of the Financial Services and Markets Act (FSMA), and accordingly, any information if deemed a financial promotion is provided only to persons in the UK reasonably believed to be of a kind to whom promotions may be communicated by an unauthorised person pursuant to an exemption under the FSMA (Financial Promotion) Order 2005 (the “FPO”). Such persons include: (a) persons having professional experience in matters relating to investments (“Investment Professionals”) and (b) high net worth bodies corporate, partnerships, unincorporated associations, trusts, etc. falling within Article 49 of the FPO (“High Net Worth Businesses”). High Net Worth Businesses include: (i) a corporation which has called-up share capital or net assets of at least £5 million or is a member of a group in which includes a company with called-up share capital or net assets of at least £5 million (but where the corporation has more than 20 shareholders or it is a subsidiary of a company with more than 20 shareholders, the £5 million share capital / net assets requirement is reduced to £500,000); (ii) a partnership or unincorporated association with net assets of at least £5 million and (iii) a trustee of a trust which has had gross assets (i.e. total assets held before deduction of any liabilities) of at least £10 million at any time within the year preceding the promotion. Any financial promotion information is available only to such persons, and persons of any other description in the UK may not rely on the information in it. Most of the protections provided by the UK regulatory system, and compensation under the UK Financial Services Compensation Scheme, will not be available.

© SEBA / Kolinplatz 15, 6300 Zug, Switzerland

Research

more
Research report
Refraining from COMP valuation
22 July, 2020
We acquaint readers with the Compound protocol and its governance token COMP in this edition of the Bridge. We present a framework to think about valuation of COMP and other DeFi governance tokens earned by liquidity mining.
Read more
Research report
The inexorable march of Central Bank Digital Currencies
16 July, 2020
The steadily growing global interest in Central Bank Digital Currencies (CBDCs) suggests that the official launch of the first CBDC is approaching fast. The Financial Action Task Force (FATF) has reviewed the “travel rules” compliance, one year after their issuance. Switzerland politicians have unanimously backed the Blockchain Act.
Read more
Research report
A new fair-value model for Bitcoin
02 July, 2020
In this edition of The Digital Investor, we propose two valuation models for cryptocurrencies. In the first model, we propose an innovative method to price cryptocurrencies in terms of fiat currency. In the second model, we propose a method to compare the price of two proof-of-work cryptocurrencies according to a no-arbitrage condition (mining parity).
Read more

Join us as we redefine finance.

Contact us
seba

SEBA Bank AG
Kolinplatz 15
6300 Zug
Switzerland

ServicesCompanyNews & InsightsCareersContact
Receive the newest insights, research and news from SEBA directly to your inbox
Newsletter subscription
© 2020 SEBA Bank AG