COVID-19 & Cryptocurrency’s Resilience: an analysis of the short term effects
Over the past few weeks, COVID-19 has brought the entire world to a standstill, with businesses and individuals alike now scrambling for economic safety. A lot of digital companies like Zoom and Amazon are faring well during these times, but if there is any industry that has continued to operate through this crisis, it would be the cryptocurrency sector.
Created in the aftermath of the 2008 recession, cryptocurrencies are highly decentralized and can in theory function regardless of socioeconomic factors. If what the economists are predicting–a global recession–this will be the first time that cryptocurrencies, as a viable alternative currency, will be put to the test. Results will differ over the short and long term and we’ll have to continuously analyze adoption rates, price, and total market cap, among other metrics. Let’s take a look at what we currently know.
How the market has fared so fair during COVID
With public faith in governments dwindling globally and the debasement of fiat currencies, Kevin Kelly, macro strategist at Delphi Digital, discusses how the behaviour of cryptocurrency buyers has changed since the beginning of COVID-19. On Laura Shin’s podcast Unconfirmed, Kelly mentions that from 2018 to recently, the markets were led by short-term buyers. However, now with the “significant amount of stablecoins inflows on exchanges and bitcoin [being] taken off the exchange”, he is positing that more holders are going into the market because they see it as a store of value in these turbulent times.
Data from The Block suggests this new buying behaviour. It found that the first quarter of 2020 saw a 61% increase in trading volume over Q4 2019, even though bitcoin’s price had only grown by approximately 4% in that time frame.
Popularity in stablecoins is growing. On April 12, 2020, Messari, a data and market intelligence platform for crypto investors, reported that the Bitcoin and Ethereum protocols had reached similar levels of on-chain value transfer amounts. (See graphs below.) The second graph shows how 80% of the value transferred on Ethereum are stablecoin transactions.
While bitcoin and other cryptocurrencies did lose a fair chunk of their valuations on Black Thursday (March 12, 2020) along with the S&P 500 and other global indices, the market has rebounded and reached nearly double its lowest valuation. At its bottom on March 12, each bitcoin was trading for around $3,800 USD. Today, however, the digital currency is trading for $7,558.86 USD (April 23, 2020), representing a price increase of over 98.9%. A similar recovery, however, did not take place in the equity markets. And, in the commodities market, the price of an oil barrel reached negative numbers on April 20, 2020.
However, we need to take into account that in times of recession, with unemployment rates in the US rising fast, and people relying on unemployment benefits, cryptocurrency won’t be the first thing they buy. People need to keep the lights on and put food on the table. We’ll have to continue analyzing the market to make sense of long term trends.
Gold and Bitcoin: Two of the Same Species
While precious metals like Gold and Silver have historically served as a hedge against economic downturns in the past, experts believe that traders may not be able to exercise the same strategy in the near future. According to a report by BullionStar, many companies and trading platforms are struggling to meet the increased demand for physical gold. Traders that purchase gold ETFs or other gold-based assets have to rely on a multitude of counterparties, which breeds risk, especially in these turbulent times. The prices of paper and physical gold have started to decouple.
It goes without saying that much of the world is currently facing logistical challenges, making physical gold deliveries impossible in some cases. Consequently, it’s likely that traders could move to alternatives such as cryptocurrency, which can be purchased online and without the risk of a third party defaulting on their delivery.
Crypto Companies Response to COVID
According to separate reports by Coindesk and Forbes, many in the cryptocurrency community were already preparing for the worst in the weeks leading up to COVID-19’s pandemic status. The Forbes report explored the state of employment in the digital currency industry. Like most tech startups these days, the vast majority of crypto and blockchain companies are young and agile, with many boasting liberal work cultures that can afford to offer employees the privilege of working from home. As a result, a surprisingly large number of businesses in the crypto ecosystem have remained unaffected by the global pandemic. Some companies such as Kraken reportedly even expanded their headcount in light of increased demand for digital currencies a few weeks ago. Bitso itself is still currently hiring.
Brian Armstrong, CEO of American exchange Coinbase, confirmed that most employees were being asked to work from home as early as March 3, 2020, weeks before other businesses followed suit. Outside the US, Bitso was one of the first in the region to institute a work from home policy. Bitso implemented strict hygiene measures in March before going fully remote on March 16, 2020.
Conclusion
While nobody knows how long this pandemic will last, the global crypto community seems committed to helping out those affected by COVID-19 in any way it can. From Ripple Lab’s $200,000 donation to Folding@Home users contributing their computational power towards medical research, many crypto users have helped in any way they can for those in need.
Special thanks to Rahul Nambiampurath for his valuable contribution to this post.
