The Covid 19 pandemic is pushing investments in cryptocurrencies, but the trend is reversing.
The researchers are proposing increasing regulation of cryptocurrencies to avoid financial risks.
A new study shows a positive correlation between the growth of Covid 19 cases and the total capitalization of the cryptocurrency market, which leads to an increase in investments in this type of asset.
Oxford University School of Law researchers report that “every case of covid-19 resulted in an average inflow of money into the cryptocurrency market, which lowered the price of assets. increase “.
However, the researchers clarify that despite the fact that the investment volume in cryptocurrencies initially increased in proportion to the number of Covid-19 infections, then this effect reversed at a time when investments were falling.
The document How the crisis affects Crypto: Corona virus as a test case (How the Crypto: Corona Virus Crisis Affects Case Study) positively correlates the market capitalization of 100 selected cryptocurrencies, their exchange volume, and the number of infections and deaths from the current global povid of Covid-19.
The study was conducted between January 1 and March 11 of this year, although the researchers express that the results of the week’s study from March 11 to March 18 were similar. It should be noted that the purpose of the document is to discuss ideas how to adapt the regulatory framework of cryptocurrencies to the circumstances of the crisis.
This indicates that, despite the trend reversal, the cryptocurrency market is “manipulating more demanding investors”, so scientists believe that this market would have the same fate as the markets. conventional finance. This situation could be due to the tight legal regulation that exists according to the researchers’ criteria regarding cryptocurrencies. what, it is worth noting could be a refuge for many during the economic crisis, like you said.
Several factors play a role in cryptocurrencies
Regarding cryptocurrencies, the market appears to be characterized by regulatory uncertainties, particularly in economic terms. “If there is regulatory uncertainty, crypto market investors are more confident that the price of cryptocurrencies will continue to rise,” they say.
The study also states that while the cryptocurrency market is transparent, this will help less experienced investors trust the influence of other investors and personalities Only by collecting information and distributing it among their followers can they generate important movements in the market.
“Apart from observation, no other form of official cooperation is required,” says how the market movements and data can be tracked.
Regarding the reasons investors switch to cryptocurrencies in times of crisis, they mention that liquidity has been an attraction since then Cryptocurrencies are available all over the world. In addition, the mistrust of central banks and institutions, which could be temporarily closed without people being able to withdraw their money, leads some investors to exchange their money for cryptocurrencies “because they always have access to their currencies,” they affirm.
Regulatory interventions in the cryptocurrency market?
The authors explain that It is necessary to optimize financial regulation due to the so-called “systemic risk”. Peculiar to this market, where anomalies can occur that can lead to bankruptcy or a general financial crisis for many companies. This “due to the effects of geopolitical events, wars, epidemics or a health crisis like the corona virus”. To protect the investor, the market in general needs to be protected, they point out first.
Research could shed light on how the cryptocurrency market behaves in times of crisis, which remains to be seen given the fact that the corona virus may be its first real macroeconomic challenge. […] Regulators need to create an action plan on how and when to intervene in the crypto market. Such intervention is the key to mitigating systemic risk, which could also affect traditional financial markets.
How the crisis affects crypto: Corona virus as a test case – Hadar Yoana Jabotinsky & Roee Sarel
Systemic risk, they explain, correlates with what they call “herds” behavior (Beware) what is understood when the decisions and movements of a group of investors (possibly connected to the same group or not dependent) are taken as an example or inspiration from other investors, who in turn follow similar strategies. Curbing these activities on the financial markets through regulatory regulation is central to researchers.
Regarding the systemic risk of the cryptocurrency market, they state that a campaign by Pump and dump led by seasoned investors who could invite more newbies to buy cryptocurrencies to generate a price hike and then sell massively, which leads to a somewhat aggressive price correction by lowering demand and of course the maximum profitability of their business.
However, since this is a case called the inverse U relationship, which refers to the slowdown in the upward trend in cryptocurrency investments during this period, Investors may have regained confidence in the institutions;; to think that “everything is under control” and is gradually returning to the traditional financial market.
Although both situations have been identified in relation to the effects of the corona virus on the cryptocurrency markets, researchers cannot ensure that this behavior is a determined rational response from investors or a strategy of Pump and dump.
An important point regarding the regulation proposed by the study can be found on page 46 of the document, where it explains that given the massive migration of investors towards the cryptocurrency market, financial institutions could deepen the crisis or collapse «The exchange of cryptocurrencies must be restricted in some way in times of crisis«.
Security tokens stand out in the full crisis
However, they later point out that a solution could be found in the output of Security token tokens (bond or equity backed) from companies listed on the financial markets that offer products or services, which would reduce the urgency of these institutions if a successful round of debt collection is conducted.
In fact, it seems to be true that some investors have taken over this type of asset, as reported in CryptoNews when prices for gold tokens like Tether Gold (XAUT) and Paxos (PXG) skyrocketed in late March.
Nevertheless point out that the measures taken by the authorities can lead to other systemic risks and may worsen the situation. In addition, “due to the technological difficulties and limitations in this regard, it would be an” impossible task “for legal entities to stop the cryptocurrency market,” it said.
Despite the fact that specialists are trying to understand in detail the relationship of the pandemic to the prices of various financial assets and cryptocurrencies, there is no denying the tremendous extent of the coronavirus’ impact on the world.
It should be remembered how in mid-March all markets, including Bitcoin and other cryptocurrencies, went down before the alarm triggered by the virus. Given the validity and relevance of this situation, even tools have emerged that reflect the statistics of Bitcoin and Coronavirus, in the service of investors and researchers who are trying to identify these meeting places and their influence.