First, sophisticated investors may manipulate the price of cryptocurrencies (“pump-and-dump” schemes) by artificially driving up the demand in order to lure unsophisticated investors and then drop their holdings once the price is sufficiently high. Worse, the chaos caused by a pandemic might lead to at least two hazardous activities that can cause substantial losses. Cryptocurrencies might become closely correlated with traditional financial markets in a time of crisis (even if there is no such correlation in normal times), so that the benefit of switching to crypto is negligible. In other words, because cryptocurrencies are not managed by a central entity but rather operate automatically, they can enable investors to hedge some of the political risk and thus become more attractive.īut other, countervailing, forces may push down demand. Furthermore, investors fearing that a crisis will lead central banks or political actors to interfere in the market may prefer to switch their investments into the decentralized cryptomarket. As a result, cryptocurrencies become more attractive compared than alternatives. The fact that cryptocurrencies can be traded from anywhere in the world alleviates, to some extent, potential liquidity constraints that can arise if local governments restrict trading activities as part of a lockdown. One set of forces leads to potentially higher demand for cryptocurrencies during a pandemic. However, this upward trend is not necessarily obvious from a theoretical standpoint, as there are several forces that might drive demand up or down in response to a crisis. Ether), showed similar (or even greater) increases. Today, the very same token costs more than $46,800 – a staggering 640 percent rise. For instance, when the pandemic erupted, Bitcoin – the world’s first cryptocurrency – could be purchased for about $7,300. One year into the pandemic, this market seems to have boomed. In our recent paper, we conducted an empirical analysis to test how the outbreak of the Covid-19 pandemic affected the market for cryptocurrencies (“cryptomarket”).
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