Published: April 19th, 2020
Regardless of where you trade, the COVID-19 pandemic is making its presence felt. Coronavirus has had an impact on every financial market and cryptocurrencies are no exception.
When the World Health Organization (WHO) officially upgraded the epidemic to a pandemic in February, investment instruments registered across-the-board declines. Equities markets saw some of their lowest valuations in a decade, and commodities continue to look for bottom, while bitcoin has seemed to be under siege by risk-averse investors.
All of these markets are reacting to fears that the pandemic will trigger global recession. Those economic worries are dragging down stock prices. The S&P 500 index shed 10 per cent of its value since the start of the year. Bitcoin (BTC) has also been hammered, trading below USD 4,000 at one point and losing half its value in one two-day plunge in mid-March.
And yet. And yet. While markets are boing roiled by a daily torrent of headlines about the pandemic’s death toll, skyrocketing unemployment figures, and market meltdowns, in financial terms at least, it's not all bad news.
Over-the-counter (OTC) cryptocurrency trading volumes have actually been on the rise since COVID-19 took over the news cycle. Data from CoinGecko shows week-over-week volume for cryptocurrency exchanges like Kraken and Coinbase notably up over the last 60 days.
And while the news has been bad in aggregate, the virus’ specific impact has been variable. Australia, which is geographically closer to China and other Asian economies closely affected by COVID-19, has not experienced a significant drop in trading volumes.
Crypto traders there have instead pivoted to a coronavirus strategy where they avoid holding volatile cryptocurrency assets until they’re absolutely necessary. OTC desks are managing crypto inventory tightly and operating ‘matched books’ to maximise opportunities when they arise and reduce risk exposure.
Given the uncertainty that lies ahead, tight inventory management at trading desks may become the norm in other markets as well.
Despite poor performance generally since February, market watchers point to the short-term rallies that have occurred in other ‘alternative’ stores of value like gold since the start of the year. With the volatility genie now out of the bottle, large swings can be expected in every asset class – crypto included.
Bitcoin's price is the natural bellwether in all of this, and crypto traders are realising that some of BTCs recent ups and downs are driven by spillover from trading decisions made in traditional markets. Institutions that maintain their own crypto positions – sometimes quietly – have been offloading them as part of their overall risk-off effort in equity and bond markets.
With the massive and unprecedented stimulus and bailout packages being announced by the US government and others, states are in a money-printing mode – and that may make bitcoin a sturdy bet for protecting assets from the inflationary spike that will almost certainly follow.
Some analysts believe the current volatility means traders should move their BTC assets to a trading platform immediately to take advantage of the price peaks and valleys. But others are starting to recommend that traders look at keeping their current bitcoin holdings in cold wallets, away from of the reach of governments or other third-parties on the blockchain.
While it may be hard to imagine bitcoin as a store of wealth in the current turmoil, the increased visibility of its performance during the crisis could mean more institutional investors take an interest. The pandemic may help bitcoin mature as an asset, and that will help stabilise its price.
That, and the astronomic easing experiments being undertaken at the moment in fiat currencies, opens up intriguing possibilities. Crypto enthusiasts have always said bitcoin has the potential to unseat the dollar as the global reserve currency. That’s been seen as farfetched in the past. Still, in unprecedented times like these, BTCs deflationary design could make it a safe haven asset during the coming economic slowdown, and push up its value under extreme inflation.
With some analysts declaring the ICO market basically dead, crypto startups have shifted their fundraising efforts on attracting venture capital.
But limits on personal movement and need for social distancing, alongside global economic uncertainty, have made this very traditional form of funding harder to access.
The private, face-to-face meetings favoured by VC firms to scrutinise potential investees have become impossible. At the same time, VCs are analysing potential opportunities with forensic levels of detail – all making it harder for crypto startups to progress out of stealth mode.
Risk-off sentiment has also seen stablecoins gain new market popularity, with dollar-backed digital currencies, in particular, seeing a spike in activity as traders and investors convert other cryptocurrencies into more stable holdings.
The two stablecoin leaders, USD Coin and Tether USD have both benefitted from inflows. At the same time, lesser currencies like Paxos Standard and Binance USD have also experienced an uptick in user interest.
Tether is doing particularly well under COVID-19, with total market capitalisation up this week by more than 40 per cent since March. The company recently issued USD 60 million more to its USDT inventory and the firm is already moving to print $120 million more on the back of rising demand from deposits out of Chinese crypto exchanges.
Data from JGZ.com indicates more than $1.67 billion in USDT was distributed in March. Total net deposits at the top 14 exchanges total of $672 million USDT – an all-time high.
Demand for Tether and stablecoins generally shows no signs of abating, which on past performance could point to a coming rise in crypto markets. Rising demand for USDT last year and increasing supply was followed by a notable crypto bull run.