Seems like, with the origin of the novel COVID-19 virus at the center of everyone’s attention, the information war playing out in modern politics is reaching a new level. Origin stories have varied, from the more widely accepted accounts of the virus appearing at the end of 2019 in one of the markets in Wuhan where locals were selling bat meat (bats are natural hosts of coronaviruses) to full-on conspiracy theories featuring the intentional engineering of the virus by the CIA in order to wage economic warfare on China and Iran, as some of the Russian, Iranian and Chinese media outlets have highlighted. Although scientists have revealed that the virus is not man-made, at this point, the well of public opinion has already been poisoned.
According to the latest updates, provided by an interactive web-based dashboard to track COVID-19 in real-time from the CSSE at Johns Hopkins University, over 82 thousand people are infected in China while the number of confirmed cases registered outside the country already surpassed 1 million, mostly in Italy, the USA, and Spain, where the death rates are considered to be the highest so far. 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 that of cryptocurrency.
The economic damage has been much more severe than previously predicted.
Stephanie Segal and Dylan Gerstel from the Center for Strategic and International Studies have gathered some surveys showing that China’s factory and service activity plummeted to its lowest level since the global financial crisis with automobile sales dropping by 80% and the total amount of exports falling by over 17% at the beginning of 2020. Many enterprises, including mining companies which make up 65% of the whole BTC mining power, are under imminent threat of bankruptcy because of logistic constraints, dwindling reserves, insufficient cash-flows, and consequently — obstacles to lending and debt restructuring assistance.
Dramatic events are taking place all over the world as more and more authorities implement extraordinary measures; from banning all public gatherings to tightening travel restrictions and ordering complete border shutdowns in order to stall the virus’s spread. As a result, the global tourism industry has been gutted.
The financial market was also hit by a roughly 30% plunge in crude oil prices on March 9 after Russia decided not to support the rest of oil producers in cutting output.
This caused a massive drop in US indexes by more than 6% (Dow Jones finished its worst day since 2008 down 2000 points, and S&P 500 ended down almost 8%), together with the entire US Treasury yield falling below 1% for the first time in history.
However, oil prices recovered on March 19, with U.S. West Texas Intermediate crude jumping more than 23%. An international benchmark, Brent crude, is now surging almost 17% to settle at $34.65 per barrel. Some saw this as a sign of hope that the financial market will gradually correct itself.
COVID-19 is endangering the US dollar’s year-long hegemony as well due to the Federal Reserve cutting interest rates to near zero in an attempt to shore up the country’s economy. On the other hand, the American current monetary policy is giving way to other currencies, for example, the euro. Despite all the worries about the European economy already being in a recession, it benefited from negative-correlation with the dollar and edged higher against the British pound. But economic predictions right now for the US and Europe are decidedly bleak. Bloomberg has estimated that the losses that COVID-19 will cause to the global economy will number about $2.7 trillion.
While all this was happening, Bitcoin, which has often been touted as a “safe-haven” asset outside of the pitfalls of traditional finance, failed the COVID-19 and plunged to about $4000 on March 12. Many Bitcoin investors opted to move their holdings into traditional assets like cash, government bonds, and even gold in order to protect themselves.
This has all been pretty devastating, but panicking now is not in anyone’s best interest. Here we are going to take a more in-depth look at the situation and see whether we can shed some positive light on what it all means for the crypto industry.
Despite people’s expectations in terms of Bitcoin performing as a “safe-haven” asset, it collapsed by around 50%, and the value of the entire DeFi market dropped from more than $1.2 billion in mid-February to $658.5 million today.
According to CoinMarketCap, the first digital currency, which still constitutes around 65% of crypto market value, is now trading at almost $6731 after starting the year at around $7000 and then rebounding somewhat from the crisis-induced crash to below $4000 two weeks ago. Altcoins have been volatile as well: many major cryptocurrencies have been trending helplessly down between 30% and 40%. In such circumstances, it’s not surprising that investors and traders are deciding to wipe crypto from their investment portfolios.
But let’s take a look back to 2017 to see if anything like this has happened before. The year of the cryptocurrency boom, when the BTC price escalated to its record high of almost $20000 after starting the year at $998 was also a bit of a roller coaster.
By the afternoon of March 10 Bitcoin had risen to over $1250 per coin, but the smooth growth was followed by a sudden 30% drop from the then all-time high of approximately $1,350 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 funds tied to crypto futures, while the BTC price recovered quite fast climbing back to $1100 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.
The prices climbed higher and higher right up to mid-December when Bitcoin peaked at over $19.7 thousand, which was absolutely mind-blowing. But at this point, we see a familiar motif with another 30% massive drop 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 $11000.
To get a better idea of how the events of 2017 match up with the current situation, check out the chart below.
As you can see, there is a precedent for an upward trajectory to follow in the wake of a big crash, which suggests that the end of crypto hasn’t come yet and hodlers are likely to pass through another endurance exam and benefit from this turmoil. Yes, if Coronavirus keeps spreading the way that it currently is, it’ll take more time for the global economy, including the digital assets market, to recover. But don’t forget that the value of any cryptocurrency is determined by public demand, not all these GDP and interest rates indicators. So it means we also have to seek the reasons for decline within the crypto space to understand how we can curtail the negative impact of COVID-19.
On the first full weekend of March, Bitcoin passed through 3 stages on its way down, and it took the price less than 2 days to fall from $9200 to $8291, lingering at $8900 and $8700 intermediate values.
This plunge resulted in $92 million worth of BTC contracts being 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.
No sooner had the crypto community started to get over this hard blow than the World Health Organization (WHO) officially declared COVID-19 a pandemic and the crypto market regressed again with prices falling by 4% and 7% for Bitcoin and other tops 20 digital currencies (except stablecoins) respectively within 24 hours of WHO issuing their statement. This seems to have been the moment when people got wise to the threat posed by the virus as a life and economy upending disaster and not some cooked up tool of political manipulation.
Binance CEO Chanpeng Zhao reacted by saying that the quickly spreading COVID-19 is not “just a hoax” and urged the industry to avoid panic but to be prepared for reality. And his words probably would have had a calming effect if Whale Alert, a tracker of large cryptocurrency transactions from and to exchanges, didn’t report a huge transfer of over 47.6 BTC worth around $292.2 million from an unknown wallet to Bittrex exchange that day.
This gave the rapid sell-off another birth and led to Bitcoin losing approximately $3000 and more panic transactions being expected during the epidemic. But we should keep in mind that the so-called whales are big market players who can secretly operate with enormous amounts of money under a preliminary agreement with exchanges. Their great fortunes allow them to influence (or manipulate) the market at will so they can cause prices to slide or explode with no one actually being capable of diverting them from the charted course. The final goal of Bitcoin whales is to buy low and sell high, out of the sight of naive average traders, so you have to think carefully before disposing of your assets, or you may simply become a victim in a scheme imperceptible to you. Especially when the vulnerability of the world economy is providing such a fertile ground for those seeking to maximize their profitability. It’s important to understand that you’re better off distancing yourself from the whales, as there’s nothing you can do against their power. And the Bittrex case demonstrates that the more obvious their anxiety is, the more suspicious the situation is.
Senior commodity strategist at Bloomberg Intelligence Mike McGlone also believes that the cryptocurrency downtrend is a temporary, mentioning that both gold and Bitcoin have suffered from the massive sell-off and “the quasi-currency companions 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.
However, since then analysts have acknowledged that it is possible for the major cryptocurrency to flop down to the below $5000 price region. And the rollout of the USA travel ban on 26 European countries in the “Schengen Area” from March, 13 helped speed up the process. Due to global virus-combating restrictions, most crypto conferences expected to be held in Asia, Europe, and the US have been postponed or canceled, which means that the organizers of these events have taken serious financial hits. And once again, the idea of the crypto market correcting itself seems relevant as this price drop is a logical consequence of breaking the head and shoulders pattern for BTC lower.
This is a kind of signal for the end of price escalation and market trend reversal, thinks crypto investment consultancy head BurgerCrypto.
One more sticking point is reduction of mining power in the run-up to the Bitcoin halving expected to occur this May.
The process of cutting block rewards in half always requires replacing old equipment in order to cope with new algorithms. And there are definitely some questions as the Coronavirus has limited the manufacturing of new machinery and therefore significantly interfered in preparations for the halving, which may be delayed, wreaking havoc with the future of Bitcoin’s credibility. But even here we have at least one little ounce of positive. The CTO of the mining pool 1Thash&58COIN Zodd Zverev believes that any slowdown in the introduction of new mining equipment will help the industry stay in a profitable zone, as the price of BTC will barely double before halving. The chart below represents that there have been no serious peaks to hash rates drawdown yet, although their growth slowed slightly from the beginning of 2020.