How Crypto is standing the COVID-19 blow

The world will never be the same again. Today this oft-heard phrase is more relevant than ever. 2020 has been full of seismic, paradigm shifting events, which have forced us to rethink the way we work and live. The changes in the global economy have affected the economic policies of all countries and lead to the employment of more secure means of payment.

The pandemic has put the entire world into “economic pause” mode, and in doing so has finally forced all of us to think about the effectiveness of the economical system we have in place. All the little fissures and flare-ups that were not normally visible to regular people have become impossible to ignore now that everything has ground to a halt. While things stand to recover once the virus abates, the way the pandemic has revealed the fragility and interconnectedness of the world economy has been startling.

Like most other assets on the planet, Bitcoin - the most valuable and established cryptocurrency, has been affected by the economic downturn. After the first reports of an increase in the number of patients with coronavirus in China, the price of tokens soared to 10 thousand dollars. However, the subsequent fall was just as rapid: in less than a week, the cryptocurrency collapsed by almost 50%, parallelling the carnage happening in the other financial sectors. So why has Bitcoin, which is considered a “protective asset,” demonstrated wild price swings, and will COVID-19 increase the demand for crypto?

 

March 2020 Market Crisis

The coronavirus pandemic has profoundly affected the global economic situation. The first blow fell on the stock markets, which collapsed within a few days under the influence of investor sentiment, reduced imports from China, the widespread closure of borders and the introduction of global quarantines. Following the stock markets, commodity markets collapsed as well.

The situation caused by COVID-19 was especially important for the inhabitants of China, both emotionally and financially. A large portion of the major Bitcoin players have been citizens of this country; they use BTC primarily for the withdrawal and movement of capital, which is a common practice given the conditions of the strictly regulated and tight Chinese currency market. The first outbreak of coronavirus was recorded there, and the Chinese began to buy Bitcoins to protect their assets, by transferring them to a quieter harbor. Of course, that precipitated a rise in demand.

What happened next? The markets collapsed, which we observed when on March 13, the price of BTC fell by 32% to $3.915, its lowest since March 2019, according to Bloomberg. During this collapse, it was noted that the Bloomberg Galaxy Crypto Index, which tracks a basket of digital assets, reached a historic low since August 2017, dropping 49% in two sessions.

As markets plunged rapidly down, a real liquidity crisis developed. At that point, it became clear that there were very few defensive assets in the world, except, perhaps, American government bonds. Even bonds of highly reliable corporations dipped by 5-10%. Gold, silver, precious metals became cheaper, although they were considered the most reliable assets. Palladium fell by more than 30%.

 

Why Bitcoin Fell with the Market

The cryptocurrency market was at first undisturbed by the events associated with the spread of coronavirus. The Chinese government first reported cases of coronavirus in December 2019, and an official outbreak report came only in the second half of February 2020. All this time, Bitcoin, as the main cryptocurrency, grew rapidly, crossing the threshold of 10 thousand dollars. Together with Bitcoin, the main altcoins grew. For example, Ethereum reached its maximum and settled at around $200 in February 2020.

For a long time, we observed a correlation of the cryptocurrency market with the S&P 500 index, which reflected general market sentiment. And when the index value fell by 7–9%, the cryptocurrency market collapsed. During the day, BTC lost 50% of its value, and the minimum price for a coin was $3.800. Why did the fall happen? There were a number of explanatory factors.

In December, investors actively bought Bitcoin, expecting a price increase, and when it happened, they began to sell. In March 2020, the market fear index reached its maximum. Investors tried to get rid of any assets that could still be sold. The first assets to sell were Bitcoins and other cryptocurrencies, which were stored in the investors’ portfolios. As a result, there was a global decrease in the capitalization of the cryptocurrency market.

In the midst of the pandemic, millions of investors around the world encountered huge financial problems — so-called margin calls. This occurs when the value of an account falls below a certain threshold, forcing the investor to add more money in order to bring the account up to the minimum value and prevent forced sale or liquidation. Obviously, when you need money, you will sell everything you have to close the margin call. Besides, in a time of crisis, you sell your assets for as much as they buy from you. People sold every asset, including Bitcoin. That is why the original cryptocurrency fell to almost 3 thousand dollars. And here are some other reasons for that, some of them quite obvious:

A sharp drop in the price of BTC occurred against the background of the continuing collapse of traditional markets.

Traders pulled their money out of Bitcoin, in the hope that in the near future there will be better short-term opportunities for switching to other asset classes, as Ross Middleton, DeversiFi cryptocurrency CFO, supposes.

Key European stock indices - German DAX, French CAC and British FTSE 100 fell within 6%. Futures on the S&P 500 signaled the opening of the US stock market by a fall of more than 4.5%.

The value of traditional defensive assets - gold, the Japanese yen and US treasury bonds, slightly increased.

WHO declaring the coronavirus outbreak a pandemic was a further impetus for a new round of stock market sales, as was the introduction of a travel ban for Europe by American president Donald Trump.

 

Bullish Trend

The specific nature of cryptocurrencies is that they tend to recover quickly. And this is already happening. Crypto has proved resilient after initially falling alongside the traditional financial market. Now on the crypto market, there are several main trends. Exchanges are gradually returning to their usual mode of operation: there are no more operational failures on the blockchain, orders are processed at a stable pace. Leading crypto sites are increasing ETH reserves, preparing to actively sell coins. All these changes signal a recovery in the cryptocurrency market.

As for the forecasts, it’s quite difficult to name specific numbers now, because the market is changing every day. The only thing that can be said unequivocally is that the market will continue to recover, and the value of individual cryptocurrencies will increase. It is likely that Bitcoin will win back its value and reach its January high of $10,000.

But a drop in the cost of Bitcoin to a low of $3,500 also looks possible. The fact is that the value of BTC directly depends on the interest of the community and investors. The cancellation of a number of major BTC-themed events has negatively affected the price of Bitcoin and restrained its growth.

 

Crypto Perspectives

After the rebound, cryptocurrency has gained many new users, interested in privacy-focused coins like Monero. People who are just starting their acquaintance with blockchain, are more cautious and reasonable than the first-wave users who bought cryptocurrency on forums that are full of scammers and the fledgling wild west exchanges. In 2020, even crypto newbies know how important it is to use a trustworthy exchange when entering the crypto space.

Obviously, crypto exchanges are very different in terms of goals, audience of users and technical level of performance. They attract users with special features and functionality. For instance, Binance only introduced the opportunity to buy cryptocurrency from Visa and MasterCard bank cards via the Simplex service at the beginning of 2019. Whereas less renowned exchanges like EXMO began their work with providing users with the possibility of depositing and withdrawing electronic money, such as WebMoney, Perfect Money, or Payeer, and use fiat funds like Visa and Mastercard, to compete with the bigger guns in the game.

However, the number of services that most crypto exchanges offer is more or less the same. The same can't be said for the number of coins and trading pairs listed on an exchange. Another crucial factor you should consider is liquidity. Here are the top 5 crypto exchanges with the most liquidity, according to coinmarketcap:

From the list, 3 exchanges have the most number of trading pairs - HitBTC (800+), Huobi (500+) and KuCoin (400+). But only the first of the three has never been hacked, so we can safely say it is the service of choice for those who are looking for a secure exchange. Finally, should we buy and sell crypto in 2020, and what will happen to the cryptosphere after the market collapse? I think we all know the answer. The history of digital money is inextricably linked to global economic turmoil. A new type of asset was born during the bankruptcy of the largest banks, and survived it. And, as the phrase goes, history repeats.