Crypto market melts down as coronavirus spreads

By Jeff Benson

The cryptocurrency market has lost $40 billion in market capitalization since Sunday. Meanwhile, US stocks failed to recover today from a loss of $2.5 trillion over the last two days. The prevailing wisdom is that growing fear of a coronavirus pandemic means the worst is yet to come.

While crypto is often lauded as a "safe haven asset" in times of crisis, the seemingly obvious answer to why crypto prices have dropped heavily against the U.S. dollar—Bitcoin is down over 6% in the last day—is that the coronavirus has crypto investors spooked, too.

COVID-19, first reported out of Wuhan, China, in December, has now infected at least 81,000 people across 38 countries, killing nearly 2,800. Yesterday, cases were reported in four new countries: Algeria, Austria, Croatia, and Switzerland.

The principal deputy director of the Centers for Disease Control and Prevention (CDC), Anne Schuchat, told reporters yesterday at a U.S. Health and Human Services (HHS) press conference that "it's not so much a question of if [a pandemic] will happen anymore, but rather more a question of when."

And while mortality rates for COVID-19 are thus far much lower than those for previous coronavirus outbreaks, such as MERS and SARS, that might actually make the economic damage worse because asymptomatic carriers (or people who think they just have a cold) can more easily pass the disease to others.

According to the CDC, as person-to-person transmission occurs, healthcare systems could be overwhelmed, while schools, businesses, and government services could witness a lot of sick days. The transportation industry has already been hit, but the bottom line is: Economic production might slow.

The darkening of the global mood appears to have finally caught up to the U.S. stock market; the Dow Jones Industrial Average has dropped more than 8% in the last five days. 

But what about cryptocurrency?

Many crypto advocates say Bitcoin and its ilk can be safe havens in times of economic trouble (See: Venezuela and its incredible tanking economy). Instead, their prices have deflated, too. Bitcoin, which was worth over $9,943 as of Sunday, was closer to $8,800 at press time. Just in the last 24 hours, BTC has lost 6% of its value. Ethereum has fared worse, with losses nearing 10%.

It's hard to know exactly what's going on, said Vega Protocol co-founder Tamlyn Rudolph, who has a master's in financial mathematics and cut her teeth in energy trading before jumping into crypto.

Rudolph told Decrypt: "If there were more mature and extensive markets around bitcoin, including markets providing forward looking indicators, such as variance swaps, hash-rate futures, liquid options, mining distribution (geographical) products, then the price moves in these markets would allow traders to analyze and better understand why the underlying (bitcoin) was moving during market events like these."

As it so happens, however, cryptocurrency markets are in their infancy. Still, Celsius Network CEO Alex Mashinsky, who has a background in economics and venture fund investing, had a theory for Decrypt that the drop is just short-term.  

According to Mashinsky, increased volatility in stocks and commodities means people are moving into gold and cash. "Bitcoin is no exception," he said.

"While it is supposed to act as a safe haven, the traders (especially those on leverage) have to liquidate first and that causes a mass selling which triggers liquidations." At that point algorithms and high-frequency trading bots observe what's going on and accelerate the sell-off. However, he Mashinsky, "After this wave, we should see normalization and new buying from the long-term holders who see coronavirus and a reason to own BTC long term instead of selling."

How intertwined the progression of the coronavirus is with crypto's price is open to debate. As Mashinsky's example illustrates, there's no clear inverse correlation between global events and market movements. Moreover, even assuming there were, it's unclear how the next phase of COVID-19 will unfold. 

"It is very dangerous to make predictions with a virus, especially a novel virus," HHS Secretary Alex Azar said at yesterday's press conference. The same advice could apply to predicting cryptocurrency prices.

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