At the moment, it would be hard to deny that we are living in a fundamentally different world than the one in which we lived pre COVID-19, with the crypto industry changing as well.
One recent research, which is the focus of attention in this article, suggests to dig into the ongoing situation and to ascertain why cryptocurrencies have been impacted by the pandemic.
The author demonstrates this is not our first bout with a coronavirus as the novel virus is closely related to severe acute respiratory syndrome (Sars) which spread around the world in 2002 and 2003.
That virus infected around 8,000 people with 800 of the cases resulting in death. But it soon ran itself out, largely because most of those infected were seriously ill so it was easier to control. Another coronavirus variation is the Middle East respiratory syndrome (Mers) which has been present since it first emerged in 2012. By now, there have been around 2,500 cases and nearly 900 deaths.
However, COVID-19 is significantly different in that the spectrum of the disease is broad, with around 80% of cases leading to a mild infection. There may also be many people carrying the disease and displaying no symptoms, making it even harder to control. So far, around 20% of COVID-19 cases have been classed as “severe” and the current death rate varies between 0.7% and 3.4% depending on the location and, crucially, access to good hospital care.
At this moment, an interactive web-based dashboard from the CSSE at Johns Hopkins University shows that over 82 thousand people have been infected in China while the number of confirmed cases outside of the country has already surpassed 1 million, mostly in Italy, Spain and the USA.
Why did Covid-19 crash the crypto market
With its rapid spread and the fear that it inspires, COVID-19 has effectively ground the global economy to a halt, penetrating into all sectors of financial activity, including the cryptocurrency world.
Firstly, the disruption to Chinese imports have directly affected the export economy of countries around the world. This had an effect on many important sectors such as oil, agricultural goods and metals.
There was a roughly 30% plunge in crude oil prices after Russia decided not to support the rest of oil producers in cutting output. This has been followed by a massive drop of US indices by more than 6% together with the entire US treasury yield falling below 1% for the first time in history.
At the same time, many business sectors that are officially deemed “nonessential” are experiencing the imminent threat of bankruptcy due to workers being quarantined, logistic constraints, dwindling reserves, insufficient cash-flows and consequently – obstacles to lending and debt restructuring assistance.
This includes mining companies which are unable to continue supporting their business in part due to, besides to the factors mentioned above, limited ability to receive mining equipment from China-based suppliers and the price fallout from the Bitcoin network over the last several weeks. Some larger mining rigs are programmed to shut off once the price of Bitcoin passes through set lower limits, and return to full functionality once the price of Bitcoin recovers to a certain level.
Since mining companies make up 65% of the whole BTC mining power, this greatly affects the Bitcoin hash rate, one of the most important indicators of the network’s security and transaction speed. Throughout March, the BTC hash rate reached its highest rate this year at 150 EH/s on March 5th before plummeting to 105.6 EH/s just 10 days later.
Despite people’s expectations in terms of Bitcoin performing as a “safe-haven” asset that wouldn’t be affected by the impending financial crisis, it collapsed by around 50%. The value of the entire DeFi market dropped from more than $1.2 billion in mid-February to $682 million today.
According to CoinMarketCap, the first digital currency, which constitutes around 65% of the crypto market value, is now trading at $7100 after starting the year at around $7000 and then rebounding somewhat from the crisis-induced crash which saw it sink below $4000 two weeks ago. Altcoins have been volatile as well: many major cryptocurrencies have been trending down between 30% and 40%. In such circumstances, it’s not surprising that investors are deciding to liquidate their cryptocurrency portfolios and opting to move their holdings into traditional assets like cash, government bonds and even gold in order to protect themselves.
This rapid sell-off began with the price fall from $9200 to $8291 in the first weekend of March. $92 million worth of BTC contracts were liquidated within a single hour on the derivatives platform BitMEX. After the total erasure of up to $680 million worth of XBT/USD long positions, data portal CryptoCompare confirmed the beginning of massive panic-selling with an average execution of over 11k traders getting rid of their spot longs per second across 230 crypto exchanges. After the World Health Organization (WHO) officially declared COVID-19 a pandemic, the crypto market regressed again with prices falling by 4% and 7% for Bitcoin and other top 20 digital currencies (except stablecoins) respectively within 24 hours after the statement.
However, as senior commodity strategist at Bloomberg Intelligence Mike McGlone believes, the cryptocurrency downtrend is temporary and both gold and Bitcoin “should regain momentum once one of the swiftest declines in S&P 500 history subsides.” Thus, BTC may well rebound as soon as gold is up again, and the rise may be spectacular.
Besides, the author notes that the crypto market has already faced such major downfalls. For example, in 2017 when the BTC price escalated to its record high of almost $20,000 after starting the year at just $998.
By March 10th, 2017 the Bitcoin price had risen to over $1,250 which was followed by a sudden 30% drop after it became clear that the US Securities and Exchange Commission (SEC) rejected the Winklevoss brothers’ initiative of a Bitcoin exchange-traded fund (ETF). However, some firms managed to impose their own rules and applied for ETFs giving special attention to the funds tied to crypto futures, while the BTC price recovered quite fast climbing back to $1,100 within 3 hours until it finally got back to normal in just a few days.
And the true crypto bull market kicked in, lifting Bitcoin and other assets to unprecedented heights. By mid-December, Bitcoin peaked at over $19.7 thousand but at this point another 30% massive drop occurred removing billions of dollars from the whole crypto market in one stroke. This move was one of the biggest market corrections in recent history, and Bitcoin was forced to commence its healing process by trying to exceed $11,000.
So as we can see looking at the historical charts for the price of Bitcoin, dramatic falls are always corrected by rapid growth and vice versa. At this particular moment, the author names several reasons for believing that the crypto market will recover and even surpass its previous stages after the virus threat is neutralized.
Opportunities for cryptocurrencies
First of all, physical cash is already becoming obsolete in the digital world. And especially now, with the Covid-19 being spread by human contact, contactless payment is the obvious answer. This sets the stage for cryptocurrencies being mass adopted amid the collapse of equity markets. In part due to the pandemic, crypto legalisation processes are already being accelerated in countries like Germany and South Korea along with central banks’ adoption of digital currencies which is the case in India. There has also been a major uptick of buying Bitcoin in Iran supposedly due to banking hours getting reduced to mornings only. This along with Facebook’s Libra and Telegram’s TON projects have the potential of turning crypto mainstream within the next 2 years, as Deutsche Bank suggested in a recent report.
Another positive trend at the moment is the crypto community getting together to create important charities that can help dealing with the pandemic’s consequences. The Giving Block has recently created its #cryptoCOVID19 alliance to give donations made in ETH and DAI for those suffering from Coronavirus and other diseases. In addition, a decentralized autonomous organization called Collab19 is enabling individuals to buy 100 tokens of the DAO cashed out on a weekly basis that can be further used to help the platform decide which charities to support with their remaining assets. Crypto enthusiasts can also donate to artists with the help of Bandcamp or to developers of 3D models of COVID-19 from [email protected], who are assisting greatly in the quest for a vaccine. So there’s so much potential for crypto not only to grow but also help fight the pandemic.
Over-the-counter trading volume is also trending upwards according to Michael Leon, who is a trader at Athena Investor Services based in Chicago. This means that traders are entering the market and gaining positions by taking advantage of the current low prices. On March 1st, decentralized exchanges (DEXs) on Ethereum registered their highest monthly trading volume, estimated at over $372 million for February, which is more than a 60% increase compared to January, as Ethereum analytics firm Dune Analytics reported. This February’s rate surpassed the all-time-high volume of $358 million recorded in July 2019.
Besides all these factors, the demand for stablecoins, especially for Tether (USDT) and USD Coin (USDC), has risen due to a great influx of funds from investors and regular traders who now prefer to use stable digital currencies instead of operating with risky assets. CEO and co-founder of USD Coin issuer Circle, Jeremy Allaire, revealed that USDC has already reached a new record level of $568 million in circulation, tweeting: “Fascinating to see ‘flight to safety’ within the crypto macro market, but also demand for high-quality USD liquidity for markets.”
So based on these circumstances, what could seem as a crypto’s downfall at first, actually may mark the beginning of a major rise in crypto adoption and the number of new investors involved in the market. While Bitcoin did not meet the expectations of being a safe asset because of its correlation with the traditional stock markets which have been falling dramatically, the crypto industry has been growing for years. The author believes this crisis does not seem to be erasing all the progress that has been made and could actually amplify it after the pandemic is eradicated.
Nobel laureate and biophysicist at Stanford, Michael Levitt believes that the US may go through the Coronavirus outbreak better than Italy, Iran and even China where we can witness a decline in the number of confirmed cases due to quarantine and social distancing measures. At the same time, the figures for Italy have gotten lower as well, which has given some cause for belief that the epidemic has reached its peak. What is most impressive here is that Levitt forecasted this decline around 3 weeks before it became true, so it seems pretty plausible when he says that we have to control panic and then everything’s going to be fine.
Another positive approach from the University of Oxford states that accepting that the true number of infected people is higher than it is presented to us, the researchers suggest that it is less likely to cause more serious symptoms and mutate much. It is also noted that “if a higher proportion of people have already had the virus…, its spread around newly-infected people will slow down”. Peter Thielen, a molecular geneticist at the Johns Hopkins University Applied Physics Laboratory explains: “At this point, the [low] mutation rate of the virus would suggest that the vaccine developed for SARS-CoV-2 would be a single vaccine, rather than a new vaccine every year like the flu vaccine.” There has also been some relevant news out of Oxford so far saying that existing medications are already being tested on Coronavirus patients to check if they can be effective against the infection.
So the author proves there are strong reasons to believe that the world will make it through the pandemic and will return to its pre-virus norms, both financial and personal. The research shows the situation is not particularly different in the crypto realm, and those looking for the best course of action seem to be thinking long-term and looking for positive side effects of the world being shaken up.