After two straight days of plummeting, the Dow is closing out its worst 48 hours since the 2008 recession. This reaction to the Coronavirus outbreak clearly indicates the fear induced by the spread of COVID-19. But it also has laid bare the shaky underpinnings of our global economy. In this Coronavirus update, we’ll explore how this crisis could be felt by both traditional and crypto markets.
In reaction to the growing intensity of the pandemic and its spread to several other world economies, the Dow fell 880 points over the last two days. This was accentuated when the US Centers for Disease Control (CDC) announced the certainty of a Coronavirus epidemic in the US. The CDC is now preparing for a near term community spread.
Coronavirus Update: Chinese Markets and Beyond
According to reports, cases of COVID-19 in China are ebbing with the help of strict quarantines and severe travel and work limitations. Often considered the world’s supply chain, the mass shutting down of Chinese businesses in 16 major cities has had a major effect on China’s economy. In turn, all those global businesses that depend on Chinese imports are also starting to feel the squeeze.
For example, companies worldwide depend on China for electrical and computer machinery, vehicles, and mineral fuels. Even tech giant Apple is feeling the effect, as they recently announced a delay in their timeline for new iPhones.
As another case in point, travel bans set up to limit the spread of Coronavirus have not contained the virus as hoped. Yet the bans, airport screenings, and border closures are severely constraining tourism and business travel both in China, as well as in the many countries the Chinese visit, including 3 million annual tourists to the US. The Chinese airline industry alone has already lost close to $30 billion in revenue due to the outbreak.
David Waslen, CEO and co-founder of HedgeTrade, a Singapore based social trading platform, weighed in on flight and travel limitations:
“If global travel stops, we’ll see ripple effects with airlines, travel destinations, and the oil and gas industry across multiple regions. We’d also likely see the trend towards localized products and services, as global supply chains are strained.”
As an example of the market crashing. If global travel stops, airlines, oil, and gas, etc. will just get smashed.
Can the world economy sustain an outbreak?
Overall, severe disruption is expected (and in some cases already happening) for supply chain managers, the travel industry, and employers of all sizes. China, much like the US, was able to quickly lower interest rates while encouraging banks to lend to businesses affected by the outbreak. But if the virus continues to spread in China despite their crackdowns, how long could their economy hold out? And the same goes for other leading economies – how long can they sustain the shut down of large chunks of their business sector?
Now, the virus may be spreading without confirmation of how it was contracted in Italy and Europe, causing additional fear in these regions, as well as those economies that depend on them. The interconnected global economy that is now in place is being duly tested.
A disconnect revealed in traditional markets
COVID-19 cases in China are reportedly ebbing with the help of strict quarantines and severe travel and work limitations. The shutting down of Chinese businesses in 16 large cities has had a major effect on China’s economy. In turn, all those global businesses that depend on Chinese imports are also starting to feel the squeeze, as mandatory factory shutdowns in China fray the lines between supply and demand.
The whole world is now bracing under the threat of a potential health crisis. While this has been going on for weeks, the US stock market had been booming until just this week. This could signal that the market itself is unnaturally inflated and not in line with what’s really happening.
In fact, some analysts think the long bull market has been over-influenced by dollar infusions and rampant stock buybacks. Propped up with such a market, how could the US withstand an extended crisis? Imagine how countries like Japan, which are already in recession, will be able to handle this type of pandemic.
“The global financial system is too leveraged to handle a severe event.”Caitlen Long
What this could mean for China
Even in China, despite their harsh crackdown, it’s been suggested that if the virus continues on its course, it could be that country’s “Chernobyl”, referring to the USSR’s devastating nuclear reactor disaster that preceded the breakup of the Soviet Union. In this case, however, China’s loss of economic power would have long-lasting effects on most major world economies.
Reminder: While we’ve been thorough in our research, it is important to note that no one is sure whether or not governments like China and the US are underreporting or over-reporting coronavirus cases according to political agendas. Please consider this with the fact that we are in an era of trade tensions and US presidential elections.
Where crypto markets come into play
There are several roles that the crypto market plays during times of upheaval and uncertainty. Bitcoin especially exudes independence from traditional market drivers.
In general, a digital currency can be accessed using any device from any location. This allows for seamless peer to peer payments in a currency not controlled by any government or bank. For these reasons, crypto may offer relief in tragedy-stricken regions. Additionally, investors may see bitcoin and other top cryptocurrencies as a long term store of value. Something to hedge their traditional asset portfolios.
Bitcoin as an uncorrelated asset
During the first weeks of the Coronavirus, bitcoin acted as the uncorrelated asset that it has often been during economic and political upheaval, showing strong growth. But the last two days took their toll on crypto’s most important digital asset. Bitcoin price fell 6% since Monday morning. But BTC has already seen several such dips in 2020, with a healthy recovery to follow.
Still, bitcoin’s value isn’t derived from the same indicators as fiat, such as interest rates and GDP. Instead, bitcoin is purely driven by demand, which is why it often remains steady when other markets are teetering.
Do cryptos create a safe haven?
“Cryptocurrency markets can provide people worldwide with a safe haven and, for some, a macro hedging mechanism.”Dave Waslen, CEO/Co-founder, HedgeTrade
Bitcoin has long been heralded as a safe haven asset like gold. Investors now turn to both in times of economic distress. In the case of the Coronavirus epidemic, even though the last few days have seen a sell-off, it is nothing unusual for bitcoin to have these ups and downs. In fact, on the year, BTC is up about 30%, while the DOW is up only 1.6%.
What about China’s mining operations?
China historically has been a major force in bitcoin mining. But because the process of mining is primarily run by specialized hardware and software, this segment of China’s business world should not feel the effects as strongly as with people-driven industries. You might say this is another reason that bitcoin is an uncorrelated asset. Additionally, because bitcoin mining is decentralized and miners operate all over the globe, a severe crisis in one region will not bring down the might digital currency.
The cryptocurrency community and Coronavirus
Cryptocurrencies already attract people with similar traits. For instance, having a general distrust for government entities and a tendency towards self sufficiency. These commonalities make the crypto community a cohesive bunch when it comes to volatile markets.
A few community members may be actively rooting for a market crash. They’re only hoping for a rise in the price of their favorite crypto. But most are content to participate as much as possible in bitcoin’s monetary policy of decentralization, scarcity, and market-driven store of value. Or they may use bitcoin as a macro hedge against economic crises and political upheaval. Either way, bitcoin users continue to stack sats while crypto traders take advantage of the expanding crypto derivatives market to help prepare for potential global distribution and business shutdown.
While they’re not all hoarding bitcoin as an end-of-days asset. But it’s times like these that remind crypto enthusiasts to HODL their bitcoin. With a steady dose of scarcity and demand-driven value, bitcoin may be the best bet during a long term economic downturn.
Coronavirus Update – Conclusion
As traditional markets buckle under a debt-heavy bubble, faith in bitcoin as digital gold remains strong in crypto markets. In fact, bitcoin rose out of the 2008 recession as a way to offer a currency that cannot be rigged, inflated or manipulated by the same economic superpowers bracing up the stock market today.
We are all thinking of our fellow global citizens who are affected by the Coronavirus. Meanwhile, it’s helpful to remember that cryptocurrencies are designed to make the most of interconnectedness. Let our work in the industry move us closer to healthy interdependence. So when an epidemic occurs, financial ruin is not a prolonged symptom of the disease.