How Past Epidemics Shook Financial Markets and How Much Can Coronavirus Infect Bitcoin
Coronavirus is set to impact the cryptocurrency market for the foreseeable future. The jury is still out on how quickly Bitcoin and other digital assets will recover from the current viral outbreak in the long run. However, we can get a glimpse into the future if we take a look into the past at how other epidemics affected global financial markets.
How much do widespread diseases derail markets, and will Covid-19 infect Bitcoin?
We aim to give a preliminary assessment of the potential impact of the Coronavirus on the financial markets, including cryptocurrency, by comparing it to other widespread diseases from recent history like SARS, Ebola and the Swine Flu.
What is Coronavirus?
Covid-19 is a disease caused by the SARS-CoV-2 virus, which was first identified in the Chinese province of Wuhan late last year. Since its outbreak in December of 2019, the pest has spread globally affecting everything from financial markets trajectories to public events and international transportation.
The World Health Organization (WHO) declared Coronavirus a Public Health Emergency of International Concern on January 30th, 2020. As of March 2020, there is no known cure for the deadly flu-like virus, and its evolution is almost impossible to predict.
At the time of this writing, Covid-19, commonly known as the Coronavirus, has claimed 93,526 cases worldwide. More than 51,000 of the people diagnosed with the disease have recovered. Unfortunately, almost 3,200 people have met an untimely demise because of it.
What Is the Covid-19 Impact So Far?
The Organization for Economic Cooperation and Development (OECD) recently warned that the global economy might experience the slowest growth rate since 2009 due to the outbreak.
The past couple of weeks have seen the major stock markets go through the worst period performance since the 2008 financial crisis. More than $1.5 trillion worth of assets has been wiped off the value of global shares.
Large corporations are moving their production centers from China to neighboring countries like Thailand and Malaysia, and many companies claim severe losses in sales, profit and brand recognition. One example is the toll that the famous brand of beer Corona has taken from false publicity, internet memes and the moniker association with the infamous virus. Some reports speak of an 8% drop in shares on the New York stock market for its manufacturer, Constellation Brands Inc.
The data that we have so far summarizes the impact of Covid-19 on financial markets into a 3.03% short term correction and generalized prudence of investors from most sectors.
How Past Disease Outbreaks Affected the Financial Markets
Financial markets are a go-to indicator for an upcoming recession. However, just because the bears take control during an epidemic, it does not necessarily mean that the economy is going headfirst into recession. Past epidemics have led to significant drawdowns, but the recoveries were rather quick and effective.
With data from the MSCI Developed Markets Indexes, we can look back and see how markets reacted to past outbreaks of widespread diseases.
Severe acute respiratory syndrome (SARS) is a viral respiratory disease of zoonotic origin that broke out in China in 2002. The epidemic lasted for almost 9 months, and it registered 8,098 cases and 774 deaths that occurred mainly in Asia.
At that time, airline and maritime services also experienced underperformance in consumer services globally.
- The short term correction was -4.11%.
- The maximum drawdown during that year was -14.43%.
- It took financial markets 3 years and 7 months to reach a new peak before a 20% fall.
However, in 2020, the world is more connected, and China is a bigger player on the world economy map than it was in 2003. The financial markets are more diverse, and new markets that didn’t even exist 17 years ago might react unexpectedly to the effects of an epidemic. One of them is the cryptocurrency market.
Swine Flu (2009)
Swine influenza is an infection caused by any one of seven types of swine influenza viruses. This disease occurs only in pig populations, and it is difficult to transmit to humans. However, once it does so, it is referred to as H1N1.
In 2009, H1N1 infected as many as 1.4 billion people worldwide, and 575,000 of them died in the pandemic. It took the World Health Organization almost 15 months to declare it over. Still, cases of death from swine flu have been reported throughout the last decade in various regions of the globe.
During the swine flu, the financial markets recorded
- A short term correction of -7.89%
- A maximum drawdown of -27.49%
- It took financial markets 2 years and 2 months to reach a new peak before a 20% fall.
Ebola (2013 and 2018)
Ebola is a viral hemorrhagic fever of humans and other primates produced by ebolaviruses. It has a high risk of death, and it kills an average of 50% of those infected. The disease was identified in 1976, but the biggest outbreak of it occurred between 2013 and 2016 in West Africa killing 11,323 people out of almost 30,000 infected. In March of 2016, it was declared no longer an emergency.
During the outbreak, the financial markets recorded:
- A short term correction of -9.1%
- A maximum drawdown of -9.72%
- It took financial markets 4 to reach a new peak before a 20% fall.
In 2018, Ebola made a short comeback in Congo where it killed 2,268 people out of almost 4,000 reportedly infected. The outbreak was short-lived, but it still managed to affect financial markets, which recorded:
- A short term correction of -13.79%
- A maximum drawdown of -20.17%
What Coronavirus Can Mean for the Cryptocurrency Market
In the wake of the outbreak, the cryptocurrency market did not seem to bother much with the news. On the contrary, the bad publicity that China was receiving from the disease benefitted the digital assets sector as investments in the Chinese stock market diminished and the ones in cryptocurrency increased.
This year’s month of February saw a large number of Bitcoin buy-ins from China. As a result, the most popular crypto in the world soared for six weeks straight since the beginning of the year.
However, the beginning of March brought news of the Coronavirus spreading far and wide beyond China’s borders. As the disease reached Europe and North America, the cryptocurrency market witnessed a slight drawdown, but Bitcoin remained up 20% for the year to date.
So far, it seems that Covid-19 has infected Bitcoin and the cryptocurrency market, but not with a potentially deadly disease.
Since the outbreak, a significant number of Bitcoin miners have been shut down by Chinese authorities. China accounts for 65% of all the mining computers on the Bitcoin blockchain. It means that the number of new blocks will decrease, but that the long-term goals of the community and the much-expected 2020 halving will proceed according to the industry’s ideals.
Another interesting outcome of the Coronavirus outbreak is a newly increased interest in digital assets. China noticed that money bills and coins are efficient carriers of the disease, so they quarantined millions of used banknotes as the country’s Central Bank emitted 4 billion new Yuan notes. The costs of producing new hard, palpable cash and cleansing the old bills put the easiness and emission-free costs of cryptocurrency into a better light.
The word of the day in the cryptocurrency market now is “caution.” Experienced investors may advise against holding highly volatile assets for too long. The fear of a pandemic that could slow down the economy throughout 2020 is still there. Both the bulls and the bears are treading lightly while eagerly expecting news about the trajectory of the Coronavirus.
Potential Lasting Economic Consequences of Coronavirus
The resulting data from the epidemic impact on financial markets shows that the future is not as bleak as it seems. The short term correction has always produced a short-lived depreciation, but the markets eventually recovered.
Seasoned investors have realized that temporary events, regardless of their magnitude may derail the direction of a market, but the trend will reposition itself on a trajectory of new highs. Recessions are cyclical, not structural events.
Coronavirus is spreading steadily and the global financial markets react to it differently. It is not the first time that an epidemic upsets global financial markets. However, the increased connectivity in today’s world weighs heavily in making exact predictions for the future of the economy.
For now, everyone is hanging by the skin of their teeth hoping that Covid-19 will not turn into a pandemic. As investments in traditional assets drop and investors look to fortify their hard cash positions, new-age digital assets remain expectant of new evolutions. The financial markets are at a standstill, and the cryptocurrency one is not an exception.
Featured image courtesy of Shutterstock.