The Correlation between COVID-19 and Cryptocurrency in Korea Market

Increasing preference for risk-free asset due to uncertainty over the widespread of COVID-19. This February was a month that can prove the value of cryptocurrency which is gradually becoming a Hedge Asset along with the increase in the price of gold.

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Market value of WTI, exchange rate, KOSPI, gold, and BTC [Analysis by CoinHubKorea]
Market value of WTI, exchange rate, KOSPI, gold, and BTC [Analysis by CoinHubKorea]

In addition to the possibility of the proliferation of COVID-19 (also known as coronavirus) confirmed cases in Korea, concerns over the breaking of global supply chain are drawing attention. In particular, the industrial metals section, which is highly dependent on Chinese demand, continued to weaken, and the agricultural products sector also decreased. Uncertainty is growing, as only precious metals (gold, silver and etc.) among major raw material sector have finished with a gain based on the demand for risk-free assets and key indicators continue to rise and fall.

Cumulative statistics for COVID-19 confirmed cases in Korea [KCDC]
Cumulative statistics for COVID-19 confirmed cases in Korea [KCDC]
In general, when financial market is unstable, money flows into fixed deposits, dollars, and gold, but the recent flow of funds is ambiguous. This is because the deposit balance of fixed deposits is decreasing and the price of gold is rising.

Reducing balance of fixed deposit

As of February 26, the balance of fixed deposits was 645.9 trillion won, down by 1.4 trillion won from the end of January.

Last year, major banks’ balances of fixed deposits began to decline after increasing steadily until the end of November (671.2 trillion won).

The reason for the steady increase in the balance of fixed deposits last year was the uncertainty caused by the U.S-China trade dispute.

The financial market has been unstable, with the stock market falling every day due to the recent COVID-19 crisis, and the balance of fixed deposits, a major risk-free asset, has been on the decline.

This means that although fixed deposits are riskless products, prolonged period of low interest rates have lowered the absolute interest rates of fixed deposits have fallen to historic lows, making them less attractive as investment products.

Five banks’ balance of fixed deposits [Collected data from each bank]
Five banks’ balance of fixed deposits [Collected data from each bank]
The price of gold and the won-dollar exchange rate are bullish

As of February 24, the price of gold in Korea has risen more than 9.0% since early this year.
The price of gold, which had risen in favor of risk-free assets since the geopolitical crisis from the Middle East rose earlier this year, reactionary fell slightly as the possibility of all-out war between United States and Iran declined and expectations for US business indicator and U.S-China trade agreement rose. But the price of gold has been on the rise due to the preference for risk-free assets from the outbreak and widespread of COVID-19, the expectation of soft monetary policies by central banks of leading countries, and the fall in real interest rates due to lower economic growth rate.

Increasing preference for risk-free assets was a main reason for the price movements of gold, with the dollar rising exceptionally.

 Market value of WTI, exchange rate, KOSPI, gold, and BTC [Analysis by CoinHubKorea]
Market value of WTI, exchange rate, KOSPI, gold, and BTC [Analysis by CoinHubKorea]
Cryptocurrency will perform as a hedge to replace risk-free assets

So far, domestic stock market have fallen (of course, there are strong connection with international stock market), the prices of cryptocurrencies have been rising, but domestic stock market and the prices of cryptocurrencies have recently fallen together. When you look at the word ‘fall’, it seems that cryptocurrency failed to hedge, a role as a risk-free asset like gold. However, under the current COVID-19 pandemic, we need to analyze how much the cryptocurrency has mitigated the fall.

As of January 29 – February 28, 2020, KOSPI fell 9.07% and Bitcoin fell 1.10%. This is why the cryptocurrency’s role as a hedge is less than gold, but a more aggressive trading institution should consider it as a hedge asset.

If the introduction of cryptocurrencies in institutions increases and liquidity is provided, more diverse products can be expected based on low correlation between assets.

2020-03-02 JB LEE

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