In brief

  • Whether this week’s collapse of stock and oil prices eclipses the economic crisis of 2008 is still uncertain, but much depends on how the United States and other governments react
  • The crypto industry must look at the wider economic impact, to judge how long it might take to see a recovery
  • The perfect storm in the markets could last into 2021 and far beyond, and will test established institutions alongside cryptocurrencies.

Central banks are sweating at the imminent prospect of a global downturn this year. On Wednesday, the Bank of England responded to the economic shock from Covid-19 with an emergency interest rate cut to reassure anxious markets. European Central Bank boss Christine Lagarde has suggested a crash on par with 2008 is looming in Europe if the eurozone doesn’t act sooner. 

Even before the selling frenzy of “Black Monday,” about $9 trillion was wiped off global stocks in nine days, the Bank of America said in a research note last week. Bitcoin and other cryptocurrencies, were not immune to the ensuing carnage.

It has been a tough day for markets around the world. Image: Shutterstock.

“We should be looking at the stocks right now to figure out how to trade crypto,” said Mati Greemspan, founder of analytics website Quantum Economics. “At least until we see a significant decoupling between the two. This might come later on, once we understand more about the economic impact and how long it might take to see some sort of recovery.... There's too much uncertainty right now to make any type of forward looking statements.” 

So what happens next? We spoke to finance specialists and economists to get their view on how the next 12 months and beyond might look for the global economy and crypto. 

How extensive could the fallout of the coronavirus crisis be?

The “perfect storm,” which marries an oil price war with coronavirus, could get a lot worse before it gets better, experts believe. The economic impact of the coronavirus crisis could last a year, and many fear a global recession is inevitable. In many western economies, long-term interest rates are already close to zero, severely limiting room for further maneuver. Despite interest rate cuts, and $1.5 trillion pumped into the banking system, the swooning markets are proving hard to revive.

Italy, the world’s eighth-largest economy, has turned to measures such as mortgage holidays to reassure the 60 million that are in lockdown. The country’s coronavirus infection rates now in five figures, and it’s become a test of how a Western economy can bear an almost-total shutdown.

But the experts differ in their views of how great the global economic fallout will be. 

“This coronavirus crisis is different to the normal economic crises we are used to,” said Edward Cartwright, Professor of Economics at De Montfort University, in the city of Leicester, UK. Instead of a fall in demand, our ability to produce and consume goods is constrained,” he said. “Indeed, the current situation is more akin to a natural disaster in which the productive capacity of an economy is knocked out of action for a period of time.” 

The aftermath of the 2008 crash was a lost decade for European economies. (Image: Wikimedia)

Potentially, this means the economy could recover quickly from the current crisis because nothing has fundamentally changed. But, there are reasons to be concerned, said Cartwright: “First the current crisis will require active involvement from governments to prop things up while we wait things out—small businesses and those on low income are particularly vulnerable. Second, there is a potential that this supply side shock could lead to a sustained downturn in demand.” 

The global economy was under threat with the US-China trade war and a general slow down. So, it may not be easy to just 'get back to normal,' he added. .  

Zach Abraham is the Chief Investment Officer of financial services firm Bulwark Capital Management, and agreed that the current economic situation is “incredibly unique,” and hard to predict.

“This is a different situation than 2008 but in some ways it's much more unpredictable as the problems caused by excess are in every market,” he said. “The variables are endless and most of them aren't looking too hot at the moment.”

Alone, covid-19 and oil price shock will not bring things crashing down, he said. But the knock-on effects certainly could. 

A drop in oil prices should result in substantial defaults in the corporate debt market, for instance.

But Stephen Moss, founder of peer-to-peer investment platform Sourced Capital,  was more upbeat. “We are bracing for impact and preparing for the worst as opposed to rebuilding from the ground up, which is a much better position to be in. When it does pass, we should see an immediate fight back to previous form and the greatest threat to the markets currently is the uncertainty of what could happen, not the reality of what probably will,” he said.

Already people are worried about job security, according to a survey published today by the anonymous professional network Blind. Over half those polled were concerned about losing their job, particularly those working for tech titans such as Google and Apple.  

A US Marshall Plan for the 21st century

In recent times, the so-called “great moderation,” saw central banks cut interest rates to their lowest level, so there’s not much room for more movement to stimulate the economy.

“I’m expecting Western countries to come out with some extraordinary plans—something like what we could have seen in the crisis of 1929,” said economist Paolo Tasca, executive director of the University College London Centre for Blockchain Technologies. But ge added that not all economies will have this luxury. 

“The US will be able to design a new kind of Marshall Plan to cope with the crisis,” Tasca said. That’s possible because they have one single voice. In Europe—with no common fiscal policy, no common balance sheet, no common army, and refugees pushing against Greece’s fragile barriers to enter the EU—that’s impossible.

Despite the bungled attempt to contain the virus and the failings of the healthcare system in the US, Tasca doesn’t believe the nation will be as hard hit as Europe. The lack of testing, and the fact that it’s possible to die of another disease, while having the coronavirus, will help to obscure the real impacts of the disease, he said. “From a cynical point of view it could be beneficial not to investigate the exact cause of death.”

Stephen Moss advises against being too alarmist. “I think it’s foolish to think we’re facing investment market Armageddon, at this stage at least,” he said.

Like cryptocurrency, assets such as oil and gold are volatile by nature, he explained. “The initial exodus of investors seen in recent weeks suggests we will see this volatility rear its head as a result of COVID-19 pandemic.” But he added that these are also some of the quickest markets to rebound.

Investors will wait for the bottom, and reap the rewards

“Even in this period of crisis people with liquidity will make a lot of profit afterwards, because they will buy at a discount. They will wait until the market reaches the bottom,” said Tasca. “This will widen the discrepancy between rich and poor.”

On Bitcoin, Tasca was even bullish. "Generally, I think Bitcoin is still a safe haven. I don’t think there’s any reason to believe the contrary,” he said. “There is no signal that entering bear market or that the market will crash in 2020.”

“How asset prices respond will largely depend on market sentiment about the long run repercussions of the crisis,” said Edward Cartwiright. “Will some companies go bankrupt? Will companies be able to get supply chains up and running smoothly? Will governments have to significantly increase borrowing? At the moment there are so many unknowns that investors will naturally be attracted to safe assets.”

But this doesn’t necessarily mean that investors will shun crypto, he said. "If cryptocurrencies are seen as an asset that can insulate from the Coronavirus shock, and the almost inevitable slowdown in the world economy, then their price is going to go up."

While uncertainty abounds, in order to attract investors, crypto businesses are taking action; exchanges, for instance, are lowering transaction fees. And, in the wider economy, mortgage holidays are being rolled beyond Italy. Expect more such measures.

But, currently, investors still lack confidence in governments’ initiatives to support the economy and control coronavirus. That uncertainty impacts all areas of the economy, including cryptocurrency.

And markets are asking hard questions. Not only about the speed and effectiveness of efforts to contain the virus and its economic impact, but also the uncomfortable trade offs between the two.