The Impact of COVID-19 on the Cryptocurrency Market: (Part 1)
Within the span of a few short months, the ongoing COVID-19 pandemic has affected financial markets around the world, causing widespread volatility and disruption to business activities. The S&P 500, one of the world’s largest indices, logged its worst first-quarter performance in history, with many stocks posting double-digit losses, a metric previously unheard of in equity markets. The crypto market stands in a precarious position during this pandemic, serving as a gold-like hedge to some and a sound investment instrument to other investors.
In this first of three articles on COVID-19’s impact on the crypto market, let’s take a look at how the digital currency industry responded to the pandemic during its initial few weeks, and analyze how adoption and other metrics could change from here on out.
Increasing Crypto Adoption Among Consumers
In positive news, the COVID-19 pandemic has demonstrated the viability of cryptocurrency as a safe and secure digital payment method. This comes at a time when the exchange of physical cash is considered to be a transmission vector for the virus. Fintech applications have already witnessed a surge in use across Europe, with deVere Group estimating the increase for their own apps to be around 72%. This includes its crypto offering, which allows users to store, transfer, and spend cryptocurrencies such as Bitcoin.
According to Marion Laboure, a macro strategist at Deutsche Bank, “The COVID-19 pandemic is accelerating the rise of central bank digital currencies (CBDCs) as many governments see the handling of cash as a potential risk factor. This will likely add to calls to move towards digital cash.”
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For the time being though, long-awaited stable coins and central bank-issued digital currencies, including the likes of Facebook’s Libra and China’s digital yuan project, have been pushed back by a few months. According to a report by Asia Times, key Chinese policymakers and research staff were not available at the height of the outbreak, potentially delaying an early 2020 rollout for the project.
Correlation Between Equity and Crypto: Short-Lived
While other financial markets faced some disruptions due to the COVID-19 outbreak, the crypto market continued operating largely as normal. A large part of this was due to the fact that the cryptocurrency industry has embraced technology more than any other sector, especially since its entire business revolves around the trade of digital assets. While CME Group and other exchanges had to shut down their trading floors as a precautionary measure, crypto exchanges did not have to make any changes since transactions have always been digitally executed.
Coinbase, among other notable cryptocurrency industry giants, offered employees the ability to work remotely at least one week before the American Government-issued work-from-home guidelines for non-essential businesses. All indicators point to the fact that productivity levels of key workforce in the crypto industry have not been majorly impacted by this pandemic.
As for the valuation of key digital assets such as Bitcoin and Ethereum, financial institutions and traders remained split on their viability as a hedge against a potential economic crisis. As a result, prices of popular cryptocurrencies began following the stock market more closely than ever before. According to researchers from Binance, a “moderate” amount of positive correlation between Bitcoin and US equities could be observed in the first quarter of 2020. Nevertheless, Bitcoin outperformed the S&P 500, shedding 10% of its value instead of the latter’s 19%. Since the start of the year, Bitcoin is still up by at least 10–15%.
The Role of Community Sentiment in Crypto Prices
Community sentiment plays a key role in dictating the overall direction of the cryptocurrency market. According to a recent report, interest and demand for Bitcoin and other digital assets has started to gain momentum. This can also be corroborated by the fact that trading volumes have been higher than ever before, with very little of that activity contributing to selling pressure on major crypto exchanges.
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