Coronavirus: How it affects on Global Economy & Cryptocurrency Market
The current pandemic begs the question, how will the coronavirus affect the glocal economy and the cryptocurrency market? This article will look at how the virus has impacted the global economy thus far and the anticipated effect of the economic fallout. It will explore the positive and negative impacts the coronavirus will have on fintech and current banking systems. Lastly, it will dive into how this pandemic will affect cryptocurrencies and blockchain as well as the way the world uses money.
1. Coronavirus and global economy
The outbreak of Covid-19 has altered the world in many ways from how we socialize to how we conduct business. Most of these changes have had a direct or indirect impact on the global economy from flights being canceled to gyms closing and millions losing their jobs. The economic fallout or the “Great Lockdown” has been said to rival that of the Great Depression by the International Monetary Fund (IMF). Covid-19 has been traced back to November 2019 as reported by the South China Morning Post and the virus is anticipated last beyond May, where the world is now will look different from the months to come.
“This is no longer only a global health crisis, it is also a major labour market and economic crisis that is having a huge impact on people.”
Guy Ryder, ILO’s Director-General
1.1 How the coronavirus has already affected the economy?
In three weeks, the pandemic led to an economic fallout and financial system crash that resembles that of the Great Depression as well as the global financial crisis (GFC) of 2008, however, those crises rolled out over a few years. According to World Economic Forum , due to the Covid-19, in just a few weeks the stock market went down 35%, interest rates have fallen, unemployment has risen, credit spread has increased like those for junk bonds, credit markets have been frozen and the oil market had its biggest collapse since 1991 when prices fell by more than one third.
BBC reported that The Dow Jones Industrial Average and London’s FTSE 100 stocks plunged 23% and 25% respectively which is the worst for them since 1987. While S&P 500 lost 20% during the quarter, its worst since 2008. No countries are being spared and worldwide indexes remain 20% lower now than at the beginning of the year.
Interest rates have also hit an all time low. In the UK, Bank of England slashed rates from to 0.1% from 0.25%. While in the US, the same strategies are being used with the The Federal Reserve lowering interest rates to near zero which is the largest emergency reduction in the history of the Fed. The target range now in the US is 0-0.25% for the interest rates. These moves are being made to cushion economies for stabilization by helping businesses and individuals cope with economic losses due to reduced incomes to unemployment, respectively.
Unemployment has been on the rise since the outbreak of COVID-19. The International Labour Organization (ILO), estimates up to 24.7 million jobs could be lost during this pandemic. In the US alone, the New York Times has estimate that 6.6 million people have recently lost become unemployed due to the pandemic.
1.2 What are the long term effects of Covid-19 on the global economy
The long-term effects of COVID-19 are anticipated to ripple for some time through the financial systems. According to the UN conference on trade and development (UNCTAD) , the global economic shortfall from the current pandemic is estimated to be around 2 trillion dollars. The UNCTAD also anticipates that countries with the strongest ties to China will have the slowest recoveries, as China is a major source of long-term money lending for developing countries. The Guardian reported that the United Kingdom’s economy could shrink by 35% and that the country is headed towards unemployment soaring over 2 million due to the virus.
Yahoo Finance reported that in the United States, Bank of America’s economics team said the economy would drop 12% whereas Goldman Sachs’ economics team estimated the economy could drop up to 24% in Q2 alone. The United State Treasury Secretary Steven Mnuchin announced at a press conference that the unemployment rate could reach up to 20% which is twice that of the unemployment levels during the GFC. Whereas, Statista is reporting that the unemployment rate could creep up to 32.1% in 2020 which is a record in the US history, surpassing that of the Great Depression.
Source: Statista: Predicted Unemployment Higher Than Great Depression
International coordination will be necessary for a macroeconomic response in programs that target public investment. International coordination will also be necessary as restrictions are lifted in order to keep supply chains from being bottlenecked. As global markets have increased in size and scope as well as supply chains becoming more complicated with goods moving cross borders in order to increase efficiency gains. It is necessary that as restrictions are lifted, countries work together otherwise bottlenecks could lead to exacerbation of sector supply chains according to Oxford Economics. As the pandemic spreads from China to the EU and US, the graph below depicts why the global economy has shrunken as these three are key players in imports, GDP, and exports non-food and non-energy related. The interdependence of nations calls for further cooperation to ensure smooth transitions back to optimal operating output.
2. How the coronavirus will affect fintech?
One interesting sector to look into is the fintech world. Fintech is the short term used for “financial technology” which is a field of technology that looks to revolutionize financial services. As digital platforms, it is likely they have not felt the impact of the coronavirus crisis the same as companies that have had to shut down their operations due to social distancing. But much like any industry, the pandemic has touched the fintech world in some ways.
2.1 What is fintech?
Fintech seeks new ways to improve and automate financial servers in order to help consumers, businesses and business owners manage their financial operations, processes, and offering specialized software and algorithms. Fintech applies to anything from innovation in business transcation to the invention of digital money and double-entry bookkeeping. Fintech aims to bridge the gap between the latest technological developments and financial systems for businesses and individuals alike.
2.2 Positive & Negative impact of Covid 19 on fintech.
As previously mentioned in this article, the crisis at hand is hurting many industries and sectors on a global scale. It is no different for the world of fintech, decreases in spending as well as dropping interest rates all have a negative impact on this particular industry.
Companies feeling the negative rippling effect of social distancing and lockdowns is the payment sector of fintech. Companies involved with payment processing such as PayPal, Stripe and Square are being hit due to the decrease in consumer spending. With restaurants being closed or having reduced traffic, Stripe and Square type payment platforms that receive money as payment terminals have experienced reduced income. Whereas, companies such as Paypal which thrive off of e-commerce have also seen a decrease in activity since the outbreak of the virus.
Yet in light of the negatives, it seems that fintech companies may be positioned to thrive in the current situation. The coronavirus has positively impacted fintech in a few major ways. According to the deVere Group , one of the world’s leading independent financial advisory organizations, the use of financial apps in Europe has increased by 72% in one week due to lockdowns and practices of social distancing. The current pandemic has confirmed the need for branchless banking, contactless payment, and bringing to light any banking upgrades that are necessary to handle a crisis such as this again.
Branchless banking does away with brick and mortar and the expenses that go with it. It removes the need for a physical building and has moved banking online. This makes it more economically feasible to service lower or sparsely populated areas. This is especially hinging on the way the world is moving towards technology, Forrester predicted that mobile smartphone subscriptions will jump to over 5.5 billion by the year 2022 and reach into markets that are smaller now such as Africa, the Middle East, as well as Latin America. If anything, the virus has strengthened the argument for branchless banking.
Contactless payments are becoming increasingly popular which is in part due to not wanting to handle paper bills or touching card readers that may be contaminated. Contactless payments are anything from using Apple Pay to a credit card with NFC technology which through radio waves can connect with the payment reader without having to touch anything or enter pincodes. According to Mercury , 38% of consumers now see the benefit of contactless payment which is up 8% from just a year ago. In Germany, more than half of all payments being made by card are now being made through contactless ways which is up from 35% just a year ago.
Another benefit the fintech industry is seeing is banking updates. Traditional banks have been tested during these times to move to accommodate others digitally while their branches have been closed by the government while fintech companies have learned where they are in need of improvements. Banks have had to rely on fintech companies to aid them and the relationship between the two have been growing and beneficial for the two parties.
Fintech stands apart from many industries in being able to leverage the current situation for the better. As a digital financial system, the global crisis has seemed to point towards and in agreement with the digital movement.
3. How coronavirus will affect cryptocurrencies & blockchain?
Along with impacting the global economy, the fintech industry, the coronavirus is anticipated to influence cryptocurrency and blockchain companies. Blockchain companies are the names for companies that create blockchains which is technology that distributes digital information that cannot be copied. Blockchains are the backbone of cryptocurrency as they are distributed, decentralized, public ledger. The graph below by Blockgeeks details the building of cryptocurrency.
This pandemic has shaped the way the world views money, assets, and the government. As previously mentioned, paper money is dying and as a virus has shown it may be better sooner than later as the coronavirus is able to live on paper bills for more than three days and aided in the spread of the virus. People have seen how vulnerable the market is as well as how vulnerable their jobs and livelihoods are in the face of pandemics. Whether people will view cryptocurrency as a safe haven or as another financial asset that is a risk is hard to predict especially as cryptocurrency did not exist during the 2008 GFC and past trends cannot be leaned on for indicators of how the market will go.
If people will turn to cryptocurrency in the short or long run is interesting to consider. Bitcoin suffered a hit from the coronavirus outbreak, with cryptocurrency trading below $9,000 in February for the first time since January according to CoinDesk. Then again in March, Bitcoin suffered another blow dropping below the $3,800 range as reported by Cointelegraph. Although, Bitcoin came about as a form of “digital gold” that would be unrelated to traditional assets thus not suffer the same fate when markets collapse, the current pandemic is testing its reliability to hold value during economic downturns as financial systems crash. Along with Bitcoin, in March 2020 Ethereum fell by more than 25% (to $120), Bitcoin Cash – by 30% (up to $179), Litecoin – by 23% (up to $36), and Ripple – by 17% (up to $0.17) according to PaySpace Magazine. This may be a result of people wanting to reduce the amount of risk in markets they currently have with the uncertainties that lie ahead in light of the oil market collapsing and news of the pandemic spreading.
Cryptocurrency in theory was supposed to be a less risky place to invest and hold up during crises. Due to mass panic and signs of economic distress many investors jumped ship like in traditional markets thus the trend seen now with cryptocurrency is mirroring that of the stock market. Cryptocurrencies may not be the safe havens they were originally deemed as. There are still a lot of problems such as safety, legality, simplicity and governmental regulation.
However, the industry has seen some positives and consistencies such as over-the-counter (OTC) trading has increased in volume since the outbreak of COVID-19. Coinbase and Kraken have also seen an uptick in volume being traded in the weeks since the epidemic began. Stablecoins, a US dollar-backed digital currency, has seen an all time high turnover of 568 million during this pandemic as many traders turned towards more stable assets. There seems to be swings in both directions for digital currency and as CoinDesk quoted Rupert Douglas, head of business development and institutional sales at Koine, which provides settlement and custody for cryptocurrencies, it is best described; “While alternative stores of value like gold and BTC have rallied since the start of the year, they haven’t fared so well over the last few days. The genie – as in volatility – is out of the bottle, with big swings ahead anticipated in all asset classes.”
The impact of COVID-19 was not only seen in the value of bitcoin and cryptocurrencies but also has greatly affected the programmers, or miners, behind bitcoin especially in China. China was the leader in mining because of low electricity prices (price range of $0.03 to $0.05 per kWh) and access to mining equipment as many of the manufacturers are established locally. In China, over 40 mining operations were shut down due to them no longer being profitable. With bitcoin dropping below $5,000, mining was no longer lucrative because even if the electricity rate was $0.04 per kWh, bitcoin had to be $5,136 to be profitable for the miners according to
Cointelegraph. This is a result from using outdated equipment Antminer S9s, an older generation of Bitmain’s popular Antminer products as well as the market drop.
Blockchain companies and government regulations around cryptocurrency have been impacted by the virus. Cointelegraph reported that many blockchain companies have had to close offices and have experienced slowdowns resulting from remote work. Chinese mining companies had to close their doors and only have just begun to reopen since the pandemic swept the nation. Russia’s government has halved the budget for the development of blockchain technologies and has postponed adoption of law on cryptocurrency until further notice. While in the United States, companies such as Cointelegraph have had to shut their doors. Blockchain companies have had to reduce staff and cut salaries like any other industry impacted by COVID-19. Chainanlysis had to cut salaries by 10% and Elliptic had to cut their staff by one third in the US and UK.
Although the crypto industry has been shaken like most of the world due to the crisis, they have added value to the pandemic outside of their typical scope of work. In fact, some bitcoiners are helping to find a vaccine for the coronavirus. A group called CorohHope, that is crowdsourcing bitcoin donations, is working towards finding a vaccine for the virus. The group has an experienced biologist working with bitcoiners in hopes to biohack a solution to the pandemic according to CoinDesk. They are working outside the Food and Drug Administration (FDA) to find a vaccine in order to avoid the regulations in place and once a cure is found, they will turn it over for testing through the FDA.
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The COVID-19 outbreak or the “Great Lockdown” began as a global health crisis and became a global financial crisis. This pandemic changed the global economy, many industries including the fintech industry, as well as tested the cryptocurrency industry and its strength. The stock market and interest rates have fallen while unemployment has risen. Weaknesses in governments and industries were brought to light. Yet it has not all been negative, many positives have been a result from the pandemic such as fintech gaining ground. Most importantly, the world can use the 2020 health and economic crisis as a guide for the next crisis to come.