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COVID-19 Is Here. How Will This Pandemic Affect the Global Financial System?
The start of 2020 has been one for the history books. COVID-19, or the novel COronaVIrus Disease, has rapidly infiltrated almost every country, infecting nearly 2.5 million people and killing over 150 thousand at the time of this writing. In response, the global economy has seemingly come to a halt as many countries have shut down non-essential business operations to prevent the spread of the disease.
The effects of COVID-19 expand far beyond health issues.
While COVID’s impact on our immune system is no doubt frightening, the economic implications of the necessary shutdowns will likely continue long after the disease is under control.
Governments are launching unprecedented levels of stimulus.
To counteract the economic blow of business shutdowns, governments are providing previously unseen amounts of stimulus to both citizens and businesses alike. Trillions of dollars in the form of grants, loans, tax deferrals, and other types of relief are entering the worldwide economy to keep it afloat.
Germany is leading the pack in coronavirus relief (based on the percentage of GDP), providing 236 billion euros ($256 billion) in stimulus funding. | Sources: CNBC, Bruegel
In Europe, several countries, including Germany, France, Italy, and the United Kingdom, have already committed over 20 percentof their 2019 GDP to coronavirus aid. Additionally, some central banks, like the United State’s Federal Reserve, have cut interest rates to bolster the economy further.
These measures help to reduce the economic impact of COVID temporarily, but that money comes at a cost. Whether it’s more inflation, increased deficits, future taxes, or some combination of effects – eventually, we’re going to have to pay the piper.
Unfortunately, unemployment rates are skyrocketing, as well.
While the trillions of dollars in coronavirus relief may be helping some businesses, it hasn’t been enough to put a cap on unemployment. Millions around the world have been laid-off, furloughed, or have had their hours cut due to COVID closures.
So far, stimulus packages have slowed the rate of unemployment growth in the European Union as well as the United Kingdom. Still, experts predict that the hold-off is only temporary. Consulting firm McKinsey warns that one in four European jobs risk some type of COVID-related hours cut.
The U.S. unemployment figures paint a grim picture of what could happen in Europe if (or when) stimulus packages run dry. | Source: CNN
How will this situation shake out for digital assets?
With such drastic changes to the global economic system, it’s only natural to assume that digital assets will feel an impact, as well. Digital assets exist to fill the gaps in and solve the problems of the traditional financial markets. In times of economic uncertainty, we’d expect adoption to increase, right?
So far, though, COVID-19 hasn’t had much of an effect on the cryptocurrency industry.
Although some cryptocurrency enthusiasts predicted a jump in adoption coinciding with the onset of the pandemic, we still haven’t witnessed much of a change.
Cryptocurrency followed almost every other major market with a steep drop in value in the middle of March as everyone fled to cash liquidity. And since then, the market cap has only risen gradually.
The cryptocurrency market is almost back to its pre-coronavirus market cap. | Source: CoinMarketCap
The effect on cryptocurrency exchanges has been a bit of a mixed bag. One skalex client explains,
“We have generally seen a significant decline in crypto purchases from institutional investors. We have also seen significant sales from these investors which, in a way, is to be expected given the uncertainty of these unprecedented times.”
However, retail traders seem to be leaning towards an opposite sentiment. Coinbase, for example, experienced a surge in trading volume during March’s coronavirus market swings, processing $2 billion in cryptocurrency over a single 48-hour period.
Some countries are now looking into digitizing their national currency.
Providing trillions in stimulus dollars to citizens proves challenging on one critical aspect – distribution. Whether it’s unemployment benefits, temporary basic income, or company bailouts, using traditional banking systems to get money into the hands of those who need it is a convoluted and time-intensive process.
The logistics surrounding COVID stimulation are forcing governments to rethink their monetary policies, and a few are looking towards digital currencies to solve the problems they’re facing.
The People’s Bank of China, for instance, is already piloting a digital version of the nation’s currency, utilizing blockchain technology to operate it. And France’s central bank is trialing a digital euro with decentralized technologies.
An early draft of the United State’s coronavirus stimulus bill also included the creation of a “digital dollar” to help get relief funds into the hands of citizens quickly. However, this section was absent from the final implementation.
Cryptocurrency adoption could skyrocket once the dust settles.
Reduced interest rates, an influx of stimulus cash, and elevated levels of unemployment – we’re setting the scene for a potential economic catastrophe. But while it’s unlikely the whole world will meltdown post-COVID, a few countries could very well run into issues of hyperinflation and currency devaluation.
These are the scenarios in which we would expect to see a boom in cryptocurrency adoption and, in turn, valuation. Satoshi created Bitcoin in response to big bank bailouts, after all. The following are a few of the scenarios that could play out.
With a predictable inflation rate, a digital asset, such as bitcoin, may become the de facto currency in countries succumbing to hyperinflation. As citizens lose confidence in their nation’s money, they may latch onto a cryptocurrency as something more stable. We’ve already seen evidence of this type of switch occurring in Venezuela.
Venezuela’s growth in bitcoin adoption coincides with the country’s hyperinflation issues.| Source: Coin Dance
If the global economies become more tumultuous, investors could also recognize cryptocurrency as a safe haven investment, similar to gold. While the S&P 500 is down almost 13 percent since the start of the year, gold is up around the same amount.
We’re already starting to see a similar decoupling in the cryptocurrency market, as well.
One significant advantage of cryptocurrency investments are their 24/7 markets. Digital asset markets don’t close on the weekends or have an after-hours period. They also don’t contain trade-halting circuit breakers (which we saw enacted during coronavirus-related sell-offs), so you can exit or enter your position at any time.
Currencies and safe haven investments aren’t the only purposes of digital assets in a post-COVID world, though. The efficiencies that come with cryptocurrency also enable:
Better loan terms for struggling small- and medium-sized businesses, including microloans
Additional investment classes for more accessible asset diversification
Touch-free payments that reduce the risk of disease spread
Cryptocurrency’s fate? It’s too soon to tell.
We’re still in the throes of the coronavirus pandemic without a definitive end in sight. There have been some significant economic shifts, and further shakeups could be in the mix.
Due to the incredibly complex nature of economics, making confident predictions can be a fool’s errand. However, the possibility of post-COVID mass cryptocurrency adoption certainly exists.
Digital asset price movements are decoupling from traditional markets, governments are experimenting with blockchain-based currency solutions, and the pandemic has thrust previously old-school traditionalists into the progressive 21st century.
While we can’t say for sure that widespread cryptocurrency adoption is on the horizon, the signs are pointing towards a positive future for digital assets.