Understanding the impact of the COVID-19 pandemic on cryptocurrency and blockchain-based asset markets: negligible or significant?
COVID-19 has become a defining moment in the course of our society, but the impact of the pandemic can be seen through its effects on the economy and society in general. From the perspective of a Bitcoin (BTC) investor, there are many things to consider.
Coronavirus emergent patterns determine how the infection spreads and sets the society on a particular course into the future. The impact of the novel coronavirus on consumer society has been tremendous. The effect has mostly been seen as the closure of workplaces, resulting in people either working from home, getting laid off or in some cases, being furloughed.
Unemployment figures have set records in western countries, especially in the United States. The road to economic recovery is still unknown. The current situation seems to indicate that businesses need new types of fundraising in order to fully recover or to restructure.
The lag between infection cases and deaths is around two to three weeks: This means that whenever the epidemic resurfaces, according to data obtained from the first wave, this happens predictably, in risk groups and regionally.
Exposure to blockchain-based assets is concentrated among young male professionals aged around 30. If we observe new entrants in the blockchain asset classes among consumer segments, we may observe that the greatest numbers of new users have been coming geographically from countries where the local currency is experiencing high inflation, concentrating roughly in Africa and Latin America. Socio-economically, they are middle-class professionals. While most are Bitcoin maximalists, there has been an increasing interest in the altcoin markets.
Recently, a buying spree fuelled by videos shared on the social media app TikTok caused a significant price spike in the value of Dogecoin (DOGE). The buyers were almost exclusively teenagers and young adults who are current cryptocurrency holders. While Dogecoin has been known as an asset whose value is based entirely on its virality, the recent phenomenon suggests that there are plenty of new entrants in the broader cryptocurrency market. It should be noted that this Dogecoin pump took only hours to top out, compared to the several weeks the eight other times the coin had gained significant value. This signals an impulsive move.
Retail investors in the risk groups typically do not invest in Bitcoin or blockchain-based assets. Wealth owned by those in their 70s and above is typically in real estate, bonds and indices. The same investors, who are the most susceptible to contracting and dying of the novel coronavirus, are the most established in our society. Meanwhile, statistics show that the deaths are heavily concentrated among working-class individuals, ethnic minorities and those lacking access to quality health care. Residents of care homes have been particularly vulnerable.
This is significant because the statistics indicate that the majority of victims of the novel coronavirus are unlikely to hold significant wealth in either traditional or blockchain-based assets. Therefore, the impact of the coronavirus on cryptocurrency and blockchain-based asset markets may be quite negligible, while in traditional markets, the outbreak is likely to unlock assets typically held by the victims. Among elderly members of the working class, the majority of wealth is held in residential real estate and pension funds.
This shows that the coronavirus’s impact may make cheap real estate even cheaper, particularly in the countryside, despite people temporarily looking for relocation there.
The effect on Bitcoin in this respect would be practically nil.
Its influence on institutional money has been two-fold. On one hand, institutions have enjoyed unprecedented support from the government through bailing out their debt by buying equity-backed bonds, and on the other hand, funds such as Grayscale Bitcoin Trust have seen increased volumes.
Institutions are traditionally seen as swing traders; they bet on long-term market moves. Institutional interest in cryptocurrencies and blockchain-based assets as an asset class has been steadily growing with the number of investment instruments increasing over the past five years. Typically, institutions hedge into cryptocurrencies and blockchain-based assets with a narrow focus on a handful of tokens and sophisticated trading techniques, such as leveraged trading and options.
On the technical front, institutions have implemented blockchain technology to support their existing services.
This means that institutions see blockchain as a tool to facilitate lag and cryptocurrencies as a way to hedge their portfolios outside of traditional markets. Arguably, this renders the influence of institutions in regard to blockchain-based assets a stabilizing factor rather than a market mover.
Bitcoin fundamentals have shown signs of transitioning into the next growth cycle in the next few years. The halving has limited the supply and placed the asset on par with leading fiat currencies regarding inflation, at around 2% per annum.
The stock-to-flow ratio is an indicator that shows overall historical trends in Bitcoin. Currently, the indicator suggests an impending rise in value over the long term. Bitcoin has risen in value at some point after halvings due to increased pressure caused by decreased supply.
Lengthening cycles is an assumption based on the hard-coded feature of halving in Bitcoin’s supply. Each cycle, the halving takes longer to occur, therefore driving a longer cycle of emergence in asset value. Data supports this assumption, as each cycle thus far has taken longer to realize its potential.
Startup companies in the crypto industry have increased exponentially in both numbers as well as total seed capital raised over time across market cycles. The ICO bubble of 2017 has shown itself to be an impulsive move rather than a one-time event. According to ICORating, there is still a substantial number of projects raising funds through initial coin offerings. The problem cited during the 2017 market bubble around due diligence has lead to the takeover of ICOs by trusted third-parties. Increased government regulation has strengthened the fundamentals of average ICO, driving interest especially among scale-ups and startups whose product ideas benefit from a blockchain-based asset either as a regulated security or as a consumer utility. Consequently, another larger ICO bubble might start to grow in the upcoming market cycle.
Organic consumer demand bottomed during the first wave of COVID-19 in western countries, which resulted in a significant drop in Bitcoin’s price. This dip was caused by initial panic-selling reaching the 200-week moving average and dipping below it, followed by a quick, V-shaped recovery. Data suggests that while institutions sold, retail bought the dip.
According to the modern portfolio theory, quick V-shaped recoveries indicate strong fundamentals on the asset. It is safe to suggest that the coronavirus at least acted as an event confirming the overall uptrend.
The upcoming bull market will likely be driven by consumer demand. While retail investors are restructuring their personal portfolios in the world outside of cryptocurrencies, they are likely to become more interested in the asset class over time. The motivation in getting into the market is dominated by hedging against inflation and being exposed to assets that may be used across national borders.
Alex Althausen, the CEO StormGain — a crypto trading and exchange platform — said:
“Nowadays, we see the correlation of Bitcoin price with S&P 500 of 66%, but we have to consider that it is the bull market. If, or when, the price of traditional assets like stocks drops down because of a second wave of COVID-19, investors will be more actively using protective assets like gold and Bitcoin.”
Bitcoin is seen as a safe haven asset particularly because it is easier for consumers to access than traditional financial instruments. There are no minimum investment amounts, no rules on accredited investors, and the increased availability of exchange services makes the asset class attractive to the average consumer.
Smart money is invested early on in promising projects, whereas dumb money usually hitches a ride on an established trend near the top. The distinction, therefore, can be made through the amount of work required to do market research, as well as exposure to the creators. Smart money represents the early adopters. Recently, we’ve seen an explosion in decentralized finance, nonfungible tokens, and more traditional security and utility tokens. Main street brands, such as European football clubs have entered the market through their own tokens and platforms.
The broader cryptocurrency market is set for a Cambrian explosion of assets and a market comparable to the creation of the internet itself. As COVID-19 acts as a catalyst in the dismantling of old institutions and legacy financial systems, it will pave way for cryptocurrency and tokens to take their place.
Bitcoin has laid the foundation for the future of finance. As Binance CEO Changpeng Zhou stated:
“The pandemic has changed the world as we know it; it will never be the same again. And in this new world, we believe crypto will play an ever increasing role.”
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.