Crypto in coronavirus times: Opportunity or Pitfall?
With the escalation of the COVID-19 outbreak in Europe and the Americas, we have seen increasing disruption in the financial markets and political spheres. Tensions have been building as more cases and deaths are reported by the day and countries take ever more drastic measures such as closing borders and locking down cities.
The impact on the stock market has left investors flocking to bonds and yields in search of safer investment options in this critical situation. The US 10-year yield fell below 1% on Monday after the Federal Reserve cut interest rates to near zero, as well as announcing it would start quantitative easing in order to pump $700 billion into the economy.
The crypto market has also felt the effects of the global pandemic. Last Thursday, bitcoin suffered its worst one-day drop in years, falling from $7,600 to $5,300. On Friday March 13, bitcoin fell to a year low of $3,867..
The bitcoin price drop was a surprise for some crypto advocates, who had argued that cryptocurrencies were the new ‘safe-haven’ assets and flight capital of choice due to their limited supply, lack of transportation issues and because they can be bought and turned into fiat very easily regardless of geographical location. In previous stock market declines, the crypto market was indeed boosted, and prices rose. However, this time, the trend does not seem to follow.
Even traditional safe-haven assets such as gold and silver are seeing a decrease in prices. The price of silver reached an 11-year low this week, while gold dropped to a multi-month low, as reported by Kitco News.
Some in the industry have said this bear run could pose an opportunity to buy cryptocurrencies.
Clem Chambers, CEO of ADVFN (which owns InvestorsHub in the US) and Online Blockchain plc comments: “Crypto is a victim of liquidity issues caused by the collapse of other markets. People are selling BTC for dollars to make margin with their banks and brokers or even pay wage bills.”
“As liquidity from central banks flood the markets, this should reverse, but the situation is very fragile with a guarantee of many outrageous situations to come.”
Next Bitcoin halving is close
Despite the sharp price drops, the crypto community is looking forward to the upcoming bitcoin halving.
With the next occurrence expected in May 2020, bitcoin halving sees the reward for mining new blocks of the cryptocurrency halved. On this occasion, miners will be rewarded 6.25 BTC, instead of the current 12.5 BTC. Halvings are scheduled once every 210,000 blocks, until the network reaches the maximum supply of 21 million bitcoins generated.
This mechanism exists to stop inflation by limiting the supply of coins: an important price and market regulator which could also indicate a price increase.
The first halving in November 2012 saw the initial reward of 50 BTC halved to 25. Since the second halving in 2016, miners have been receiving 12.5 bitcoins for each block successfully processed.
However, other crypto experts argue that the circumstances are different in 2020, and that the two previous halvings should not be taken as an indication of price surges.
"The bitcoin ecosystem today is arguably very different from previous halvings: four years ago, crypto derivatives markets were in their infancy, institutional involvement was slim and valuation frameworks were practically non-existent. It’s not unreasonable for investors to believe that this time it’s different," wrote Noelle Acheson, Director of Research at CoinDesk.
Blockchain to rescue the global economy?
The global pandemics and the ensuing stock market plunge have thrown the current economic model into question by showing it is not fool proof, nor does it protect individuals in times of need.
So, can new technology step in? Many of us think so.
Cryptocurrencies, by their very nature, challenged the economic model and were designed as a decentralised, borderless alternative to traditional currencies. The foundation of the cryptosystem is to democratise access to money and financial services. Even in their infancy, before the price booms and institutional investment, cryptocurrencies attracted advocates who believed a new finance model was possible and necessary, an idea we have recently been sharply reminded of.
The criticism of the current system comes from some of the most acclaimed names in the crypto industry, such as IOHK and Cardano founder Charles Hoskinson. In times of a drastic crisis like the COVID-19, we can see how fragile economic and market systems are. Through a pragmatic view, we see that the current economic and financial system works on the basis of artificial sums of money coming from trade and debt, being kept afloat by interest rate cuts and weekly cash injections from central banks.
Hoskinson believes in the potential of cryptocurrencies like Cardano and even believes that blockchain technology could benefit from the current crisis, offering better future prospects and a healthier financial system.
“They are probably going to want financial freedom and our industry as a whole is the only one that can offer that so the worse this pandemic gets, the better it’s going to be for our industry and for people’s perception of the need for new systems to solve complicated problems,” Hoskinson commented.
On his Twitter, Hoskinson said that the $700 billion ‘quantitative easing’ announced by the US government — what he called ‘dumpster economics’ — would not happen in the crypto sphere.
While there seem to be no right answers in this unprecedented scenario, it feels crucial to ask the right questions about building more resilient and fairer solutions.
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