How COVID-19 & The Economic Decline Impact The Valuation of Bitcoin
The planet is captivated by COVID-19. It doesn’t matter where you go or stand, fear of getting the disease is everywhere. This has an effect not only on people’s moods, but also on health, society and the economy. People can die from COVID-19, economic supply chains are severely limited by government measures to prevent spread of the disease and local economies have to survive of their financial reserves. However, it is often unclear what exactly COVID-19 is and what the exact effect is on the economy and the stock market. And even more important for cryptocurrency investors: what is the effect of COVID-19 and the downward economy on the (future) valuation of Bitcoin?
It all started in Wuhan, China
It all started in Wuhan, China in December 2019. A new coronavirus called SARS-CoV-2 broke out. This virus can cause the disease COVID-19. The virus causes fever and respiratory complaints in humans and can cause very serious health problems. Some people even die from it. The virus is highly contagious and has spread all over the world. Meanwhile (Friday, March 27), more than half a million victims have been infected and more than 20,000 people have died from the disease COVID-19. A terrible dissease and a huge health risk, especially for vulnerable groups such as people with diabetes and the elderly. Various countries have taken extreme measures such as lockdowns and social distancing policies to protect these people. This limits the spread risk of SARS-CoV-2, but it also has side effects such as the dysfunction of the economy and society as we know it.
Tough times for our economies
Global and local economies are being hit hard by lockdowns and other government measures to combat the spread of the virus. Internationally, there is hardly any purchasing and sales possible due to supply chains restrictions. In addition, many local businesses, where human contact is inevitable, have been closed. Examples include restaurants, clothing stores and bars. This does not benefit small entrepreneurs with limited financial reserves. However, both large and small companies want to continue to exist. And that is why they are currently cutting staff short. On Thursday, March 26, it was announced in the United States that 3.3 million unemployment claims were filed within a week. This is the highest number in all of the United States’ economic history.
Stock markets are weighed down
Economic conditions are largely reflected in the equity indices. For example, the SP500 and Dow Jones declined more than 35% within a month. An unprecedented decline. Not only did US indices drop dramatically, so did other countries’ indices. COVID-19 is at least a catalyst of that, because now the price has risen again about 20 percent since the huge decline. It remains to be seen whether this is a relief bounce after the announcement of infinite quantitative easing and a huge package of emergency funds or whether this is actually a long-term bottom of stock indices. With the skyrocketing unemployment rate and the exponentially increasing number of victims of COVID-19, it seems a naive thought to think that we are now happily continuing to go up with rising stock prices.
Bitcoin cannot escape it (yet)
Bitcoin and other cryptocurrencies do not escape the horror film that is currently taking place in our real life. Prices fell even faster than the stock indices and Bitcoin even experienced a drop of more than 63%. Bitcoin’s additional downturns are said to be caused by a cascade of stop losses on leveraged positions on the exchange Bitmex, one of the largest cryptocurrency exchanges. Bitcoin has since climbed back to almost $ 7,000. Almost doubled the price since it hit the low at about $ 3,700 (varies by exchange). We can conclude from this that Bitcoin and SP500 are correlated to each other and that Bitcoin and other cryptocurrencies do not (yet) manage to manifest themselves as a hedge against economic recessions such as Gold. Gold has been doing better since the start of SP500 decline after World Health Organization (WHO) labeled COVID-19 as a pandemic. Gold is currently (27 March) only about 2% off the valuation of mid February, where Bitcoin is still 35% off. It should be noted, however, that in these observations the price action before mid February, before the start of the economic downturn, has been disregarded.
Is there a capital flight to Bitcoin?
The question, however, is what the expectations of cryptocurrencies are in the near future. Many traders and investors are wondering if Bitcoin, like gold in 2018, is going to detach from stock indices price action. They sometimes argue that because of the scarcity and potential to be a store of value, or digital gold, Bitcoin could experience tremendous growth in times of recessions, cash injections from central banks and interest-free loans. In addition, Bitcoin is censorship resistant, which means that it has nothing to do with asset seizures, bank failures and bail-ins. Things that are unlikely, but become more plausible in a longer and more severe recession than in 2008. Well-known analyst Willy Woo compares the price action of ‘safe harbors’ of 2008 (gold) with the potential safe harbors in 2020 (gold and Bitcoin). Although the analysis is premature to provide certainty of a decoupling, the first signs of a decoupling of gold and Bitcoin with the SP500 seem to be visible.
Willy Woo his comparison on decoupling of 2008 and 2020 on 24 March
COVID-19 is a serious health threat to ourselves and our economies. Among other things, the disease causes severe shortness of breath, colds and fever with the risk of death. As a result, governments have taken measures to lockdowns and to partially close down local economies. Due to the lockdowns, supply chains are limited and people cannot work optimally. While governments and central banks are trying to mitigate economic damage with interest-free loans and ‘money printing’, stock prices are falling, companies are falling and an unparalleled record of layoff claims has been filed. Although financial incentives from central banks and governments are causing a stir, the trend is negative. This also applies to Bitcoin, as Bitcoin moves with the stock indices. Many investors and trading believe that Bitcoin can detach from the economic downturn as gold did in 2008. They believe it would be a store of value due to the censorship resistance, scarcity and potentially massive inflation of fiat. However, this is speculation; the current charts show little of this yet. It is exciting to see if Bitcoin can deliver in the coming quarters ‘what it was made for’.
Contributed by @LordCatoshi
Additional sources (not used for the article)
- Bitcoin en het Coronavirus, vooralsnog een slecht huwelijk. Of toch niet?
- Corona-update: bankbiljetten in quarantaine, recessie in Italië
- How will all the chaos in the world impact the price of bitcoin?
- How COVID-19 is impacting the crypto asset industry
- ‘China stelt nationale cryptomunt uit vanwege Coronavirus’
- COVID-19 – Long term impacts
- Impact on Fintech
- COVID 19- A Pandemic That is Affecting Bitcoin Prices and Halving