Remember January 1st, 2020? Everything seemed to innocent back then. People were discussing the US-China on-again, off-again trade war, OPEC was getting along with its allies and many people were already planning their spring vacation abroad. Now fast forward to August and it’s like the world is trapped in some low budget Hollywood disaster movie. The pandemic crisis has taken over the world, affecting each and every one of us and changing the daily reality of billions of people.
The impact on the global financial market has been substantial with essentially every financial instrument affected in some way, and cryptos were no different. Some people might find this surprising. After all, cryptocurrencies are decentralised, and are not connected to a specific economy. However, as 2020 unfolded, it became clear that cryptos were responding to the global crisis. Want to know how, exactly? Let’s take a closer look at the king of cryptos, Bitcoin, how it behaved so far and why.
2020 starts with a crypto bang
As the COVID-19 was spreading throughout the world, Bitcoin’s trading price began to increase, adding more than 47% between January 2nd and February 13th. The real question is why. Well, no one knows for sure, but there are two very plausible reasons. The first one is “halving”, a planned reduction in the rate of Bitcoin mining, designed to limit price inflation.1 Since traders knew the rate of mining will decrease, hence impacting supply, it makes sense that the price was climbing.
Then there’s the whole safe haven issue. Some people have claimed in the past that Bitcoin presented certain safe haven quality. Safe haven instruments, as you probably know, are financial instruments such as gold that traditionally tend to rise during time of market uncertainty – although, and we want to make it perfectly clear: this does not always happen. in any event, with the pandemic crisis boosting market fears and uncertainty, it appeared as if Bitcoin might be proving those claims right. Other cryptocurrencies were also increasing. During the first month and a half of 2020, Ripple rose by over 70% with Ethereum and Litecoin both increased by over 100%.
What happen next demonstrated that a trend or two don’t prove anything. As the coronavirus crisis was continuing to escalate, the cryptocurrency market fell… well, crashed is more like it. In a single month – between February 13th and March 13th – the price of Bitcoin price fell by over 60%, and other cryptos were also decreasing. Why? One possible explanation is that as global markets were falling, traders were selling cryptos in an attempt to cover losses.1 However, that’s just an assumption, and there are many other explanation, one of which is that market sentiment has simply changed as panic spread through global markets.
Central banks to the rescue
In March, many governments and central banks were moving into action mode. They announced various, unprecedented stimulus packages in an attempt to breathe life into their struggling economies. Interest rates were cut, the pace of bond buying increased and policymakers were spreading cash all over the place.2
All of these steps led to rising concerns regarding global inflation, and when inflation fears surge, some traders turn to instruments that cannot be printed out or manipulated by government, once again supporting cryptos’ appeal. Risk appetite might also have changed with economies slowly reopening. Whatever the cause was, the result was clear: The market began to surge and continued the general uptrend more of less undisturbed by early August. Between March 13th and August 2nd, Bitcoin price rose by over 120%, reaching levels not seen since August 2019.
While the market has stabilized to some degree, uncertainty lingers. Some countries are lifting up lockdown measures, but others are reintroducing them. There are talks about a second wave and no one knows what will happen when winter returns. Many factors can affect the cryptocurrency market including the pace of the economic recovery, new stimulus packages, the discovery of a vaccination or a substantial increase in infection rates. And let us not forget: The US Presidential election also adds uncertainty to the already agitated market. All traders can do is follow news, stay informed and react quickly to market changes.
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