Bitcoin & Coronavirus effects

The coronavirus (COVID-19) outbreak that started in the end of 2019 has had a severe impact on most of the world’s economies. The Organisation for Economic Cooperation and Development (OECD) has stated that global economy could grow at its slowest rate since 2009, all equities markets took a heavy hit, governments have set travel bans which has resulted in massive losses for travel companies and factories (especially in China) had to take a step back due to the quarantine process.

Bitcoin: Safe Haven?

From a macro perspective, Bitcoin and Gold retained their high correlation as prices simultaneously dropped and recovered. However, the main effect on Bitcoin in terms of the novel COVID-19 is the effect on mining, as without miners the network would come to a halt and no more transactions would go through; essentially “killing” Bitcoin.

Mining Impact

Mining is heavily centralised in China, in fact over 50% of global Bitcoin mining is performed by China-based mining pools. For a decentralised asset this, in itself, poses as a threat to the network’s integrity and survival.

Additionally, as the outbreak occurred in China and the Chinese governments took the hardest precautions, it had a significant effect on Bitcoin.

As the halving approached, mining businesses have ordered new mining equipment in order to prepare for the 12.5BTC to 6.25BTC block reward drop by upping their computing power. Unfortunately, as the Chinese government asked for factories to halt production, nothing could be delivered.

When a halving is around the corner, we expect the mining difficulty to increase as more hash power enters the business which was not the case in the beginning of the year. Recently however, as the Chinese government urged businesses to resume operations, mining equipment manufacturers such as Bitmain were able to restart production and start delivering the new products.

This brief period of low difficulty was not all negative as it gave retail miners a small window of opportunity to increase their profitability before the new higher computing power enters and leaves no crumbs behind. Currently, the network’s mining difficulty is at 15.49T and is estimated to increase by over 4.5% on the 10th of March 2020 to 16.20T.

This event was not catastrophic for Bitcoin as all miners had to face the same issue. Additionally, any loss in hash rate due to mine closures was quickly compensated by other miners. As a very competitive line of business, “killing” it is not simple in any way. 

Pandemic State

On March 11th 2020, COVID-19 was announced as a global pandemic by the World Health Organisation (WHO). This has triggered a panic state in financial markets. Equities opened limit down, the S&P500 lost 7% of its value at the daily open (12/03/2020) and the markets immediately experienced a 15-minute trading halt.

The ECB also met (12/03/2020) where speculators were expecting at least a 10 basis points rate cute which may provide some relief for the markets considering the catastrophic economic conditions in Europe. However, to everyone's surprise, the rates remained unchanged which surely did not help the markets.

The Federal Reserve "may" cut rates further in next week's meeting which should, in theory, provide relief for the markets.

The initial spread of COVID-19 started in China where city lockdowns were ordered. The pandemic was announced once that spread reached many other countries worldwide and some regions were locked-down like Northern Italy. There is a clear lag between the situation in China and the situation in the rest of the world, which may provide a lens to look into the future.

Chinese businesses have returned to normal operations and some even shared normal city life and traffic jams during rush hours. If that lag continues then the situation may soon hopefully get better in the rest of the world. As the market crash was caused by COVID-19, any positive news at this rate may provide some market relief.

Additionally, as asset classes are in correlation during this black swan, that effect may extend to cryptocurrencies as well.