It will take some time to fully understand the economic impact of the COVID-19 pandemic but clearly the economic fallout will be profound. Markets have tanked, default risks are rising and unemployment is moving up rapidly in a historic fashion. Simultaneously governments everywhere are moving quickly to mitigate the risk fearing a recession, or even worse, a depression.
But what of cryptoassets or digital assets? While blockchain-based assets are frequently touted as alternatives to traditional assets or even uncorrelated to traditional markets it will be hard for any asset class to dodge the shock of the Coronavirus.
Below are multiple comments from crypto-industry insiders and their expectations for digital assets as the world navigates the pandemic.
The consequences of COVID-19 are expected to exceed that of the 2008 recession, as well as the Great Depression, and global economies
Nick Cowan, CEO of the GSX Group, the entity that operates the Gibraltar Stock Exchange as well as the Global Blockchain Exchange, had this to say:
“Cryptocurrencies are not immune to market turbulence, with natural fluctuations illustrating regular asset class behaviour in so far as smart money trading and herd mentality tendencies are clearly visible in the market. The dizzying price high that defined late 2017 was an unrealistic representation of BTC and the subsequent price drop painted a picture of high volatility. However, since then, market patterns have been generally positive, with normal peaks and troughs along the way,” said Cowan. “In terms of a post-pandemic market, I don’t expect cryptocurrencies to suddenly become a fixture in the safe haven category with gold for example. Rather, adoption levels will continue to increase, particularly as major financial institutions and fintech platforms continue to show interest in this asset class. However, the idea that blockchain-powered finance is limited to cryptocurrencies is passé, and there are other significant developments enabled by blockchain that will broaden global liquidity pools, specifically the proliferation of tokenized or digital securities.”
Cowan said that as we emerge from the global pandemic he expects to see a revelation of the capital markets infrastructure – particularly around the T+2 model for securities:
“This delay of two days places unnecessary stresses on the capital markets, particularly around the prevalence of counterparty risk. Harnessing blockchain can help classify this protracted settlement delay and counterparty risks as obsolete,” Cowan explained.
Erick Pinos, Americas Ecosystem Lead at Ontology , a “high performance public blockchain, said that Bitcoin was one of the number of technological innovations created in response to the 2008 financial crash:
“The concept of Bitcoin as a safe haven during a global recession is one that has long been touted by industry players. However, so far, the current market downturn has not resulted in investors flocking to Bitcoin. At this point in the crisis, this is not surprising. It’s important to remember that it is still very early days for both the crisis, and for Bitcoin. Bitcoin has never lived through a recession, so it’s difficult to predict how things might pan out, and how actors might respond in what is likely to be a long road to economic recovery,” Pinos shared. “What we can expect to see as a result of the global pandemic is an even greater spotlight on digital assets, each from governments, central banks, traditional investors, and enterprises. This is due to their ability to offer users increased trust, security, and access, while also providing an opportunity to avoid many of the risks associated with traditional markets and fiat currencies.”
Jason Wu, CEO of DeFiner.org, a peer-to-peer network for digital savings, loans, and payments, believes that a recession will be the catalyst for mass adoption of digital assets as well as decentralized finance or DeFi. Wu said that DeFi builds trust whereas the traditional financial system is based on human trust and company reputation:
“DeFi allows people to manage and own their assets without any intermediaries. The 2008 financial crisis taught people that financial intermediaries are not always trustworthy. The current financial system is associated with high-costs and lacks transparency. Thus, a future financial crisis could also be a factor in proving the worth of DeFi. Bitcoin was born from the last financial crisis and DeFi will thrive in these economic conditions. While a global recession will be good for digital assets, it will crush the market at the beginning due to the liquidity crisis. The world of cryptocurrency will suffer first, then prosper. There are three phases: Liquidity, Suffering, and Thriving,” Wu said.
He is of the opinion that during “phase one” cryptocurrency will face liquidity issues and will decline in price similar to all financial asset:
“This has happened last month as [the] Bitcoin price dropped dramatically from approx. $9000 to $4000. In the financial crisis, everyone is looking for liquidity, because their normal cash flow is interrupted. In phase two, cryptocurrencies will suffer, together with other industries. In this phase, a lot of companies will go bankrupt and people will lose their jobs,” Wu predicted. “Financial institutions will go into default and bankruptcy, and balance sheets of depository banks will end up with a deficit. Then the central bank will step in and print out even more money. This will lead to inflation. In phase three, people lose faith in the existing financial system. DeFi is an alternative system for people to manage and grow their savings. It’s cheaper, faster, and gives back people full control of wealth. People will learn from their painful experiences and embrace the world of crypto to enjoy true financial freedom. For the next several decades, more and more assets will be managed through blockchain and the world of digital assets will thrive.”
“Cryptocurrencies seem to be taking as much beating as debt, equity, and commodities like Gold. This happens because, at the onset of a recession, when panic strikes, all fundamentals are lost. However, during a crisis, debt and equity lose value because of the decline in asset value and decline in profit, respectively. But the underlying value of cryptocurrencies doesn’t lose value during a recession; in fact, it gets even stronger,” posited Singhal. “A global recession is a defining moment for cryptocurrencies. The long-touted “Bitcoin is a safe haven” is put to the test during a recession. A recession forces governments worldwide to introduce measures to ease the downturn, which will have adverse economic effects for years to come. Cryptocurrencies are inherently designed to be hedged against such implications. This makes an excellent case in favour of cryptocurrencies.”
Singhal said that as panic hits and irrationality creeps in the markets will see a massive sell-off in all categories:
“The decline in asset value and profits during a global recession will drive debt and equity prices to even lower levels. And this might further lower the prices of cryptocurrencies. However, it is not an indication of loss in the inherent value of cryptocurrencies. The underlying value of cryptocurrencies defined by decentralisation and mathematical stability will continue to hold even in the worst recessions. Cryptocurrencies will then become the choice of investment during such economic turmoil.”
Nicholas Pelecanos, Head of Trading at NEM Ventures, views cryptocurrencies as an uncorrelated asset class:
“Hidden in the bitcoin genesis block is a quote that perhaps acknowledges Bitcoin’s true purpose: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. The creation of Bitcoin is not incidental to financial crises but a direct response to the 2008 financial crash and failings of the global financial system. As a global recession or even depression looms, I’m more bullish on Bitcoin and cryptocurrencies than ever. Unlimited QE, unserviceable global debt, a failing monetary system and negative interest rates all at a time where society, globally is moving away from cash. This is precisely what Bitcoin was designed to hedge against,” Pelecanos said. “The crypto sell-off witnessed in March was a result of a global liquidity event and Bitcoin has now climbed 90% from its low—a swift recovery. More importantly than being a safe haven, Cryptocurrencies are an uncorrelated asset class. This alone can attract a lot of capital in times of uncertainty and with a total market capitalization of $200bn it won’t take much capital inflow for the price to rapidly climb.”