growling bear bitcoin market panic
Bitcoin,  Cryptocurrencies

Bitcoin too efficient for its own good

Facing a cash crunch after the stock market tanked today, investors sold off cryptocurrency holdings that settle in seconds to protect securities investments that take two days

It isn’t entirely fair to claim that bitcoin’s reputation as a hedge against bad times fell short on a day in which the word “panic” was used to describe the markets.

But, the leading cryptocurrency fell more than 7.5% percent on March 9, dropping briefly below as $7,700 according to CoinMarketCap. At 7 p.m. it was at $7,892, down 3.99%.

So, what happened? Well, one answer is that bitcoin trading proved a little too quick and easy for its own good.

Stocks were hit so hard that the stop-loss circuit breakers halted trading on the NYSE after four minutes of trading. The Dow Jones closed down nearly 7.8% and the S&P down more than 7.6%, according to Bloomberg. 

The problem is that the sale of most securities, including stocks and mutual funds, take two days to settle, under the Securities and Exchange Commission’s T+2 rule

Bitcoin, on the other hand, settles in seconds.

That’s particularly noteworthy on a day of panic selling, said Donna Redel, board member New York Angels, who teaches blockchain and cryptocurrency courses at Fordham University’s Law School.

With the stock markets collapsing, “investors look for quick cash settlement for liquidity or to cover margin calls,” Redel explained. “Selling stocks takes too long.”

Investors can face huge losses if they miss margin calls—essentially demands to deposit more money into brokerage accounts—for securities they bought with borrowed money. Brokers generally require at least 25% of the value of a position to be on deposit, and will sell off securities regardless of value to maintain that.

As a result, as more mainstream investors add cryptocurrency to their portfolios, there are more people for whom hodling is not an option during a true market rout.

Nor was bitcoin the only cryptocurrency affected. As of 7 p.m. ET, Ethereum (ETH) was down 3.80%, XRP was down 0.89% and Litecoin was down 5.54%. 

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.