29 April 2020


Yara Ainsworth

Yara Ainsworth

Head of Marketing und Communications bei Crypto Finance AG

Über den Autor

Black Thursday & the crypto markets: what happened in March 2020 & the impact mid to long-term for crypto assets

With the recent impacts on the financial markets from coronavirus, clients, investors, and partners have asked us about the outlook for the crypto markets. We thought it valuable to share our views in two formats: a review and FAQs looking at the wider context of the traditional and the crypto markets. We welcome your questions as we all go forward in this new reality.

On March 12, 2020, the major impact of coronavirus peaked across the global markets. On this Black
Thursday, the price of bitcoin fell nearly 40 percent to $4,000, in the largest single-day drop since April 2013, when the Mt. Gox exchange made headlines. Now, bitcoin prices are back over $7,000, which remains a remarkable 40 percent increase over April 2019 last year (time of writing: April 27, 2020). On the surface, the negative economic impacts of coronavirus have resulted in an incredible decline in asset prices, with the added catalyst of an oil crisis. As investors sought to reduce risk, the crypto asset markets declined over 50 percent from the February 14 Valentine’s Day high to the low on March 12.
A further trigger: as crypto asset prices dropped, crypto derivatives traders sold off highly leveraged positions and accelerated this dramatic spiral. Even with bitcoin futures contracts available from well-funded, regulated institutions, including CME Group and Bakkt, major derivative volume persisted in off-shore, un(der)-regulated exchanges.

These exchanges gained further infamy on March 12 with their “perps”. Perpetual swaps offer contracts with up to 100x leverage, with no expiration date or alternate funding mechanism. Leveraged traders experienced a wave of liquidations as crypto asset prices dropped. Funding rates also plunged as traders attempted to move perpetual swaps closer to spot. As market makers tried to price these instruments, spreads widened to historic levels. Over $1.5 billion was liquidated from March 12 to 13 on one exchange alone, forcing some traders and funds to shut down. In this crisis, it was liquidity needs and emotions, rather than fundamentals that drove the market across all assets.

Questions about structural integrity in the crypto markets saw the maturing ecosystem with a wider basis for continued trading, with only a few exceptions. This included crypto asset managers who were not responsive, and the exchange BitMex, which suffered a DDOS attack during the highest level of volatility. Many BitMex players were unable to trade, and were forced to just stand by and watch as their positions were liquidated. In past crypto market cycles, situations like these have made it critical to ensure a plan for market extremes is in place and alternative liquidity is available.

What factors impacted the markets on March 12?
A strong push to liquidate highly leveraged positions across multiple asset classes, including crypto assets, ravaged the markets on March 12. It was the quickest bear market in history, looking at S&P 500 historic declines.

Prior to this, traditional markets had grown to a state of speculative euphoria, driving record market highs in February 2020: investors were buying record amounts of call options, betting on stock prices rising further. Asset managers were betting record quantities on stock futures and increases in underlying indices. S&P futures hit a new high in February, and hedge fund borrowing to buy stocks was at a 24-month high.

This euphoria was not a coincidence: major retail brokerages had recently eliminated trading commissions. In scenes reminiscent of the dotcom boom, stocks were doubling overnight. Several big players were highly confident that markets would keep rising, fuelled by retail investors. High frequency trading firms, executing buys and sells for clients, were running their own trading strategies to profit from this. This borrowing and speculation deflated in late February, revealing enormous underlying imbalances in corporate debt. As the prospect of massive sales shortfalls due to coronavirus lay this bare in March, the debt aspect of the current crisis gained attention. Traditional markets began asking: “What’s ahead?”

Across all regions and nations, it now looks certain that the economy will shrink for the first time in four decades. And going forward, unheard of levels of economic stimulus from government will impact this, too. Tailored responses with support for those who need it most, and smart, creative development will accelerate recovery. Coronavirus is bringing major shifts in how the world interacts and the economy operates.

With programmes adding large sums to the economy, one expectation is inflation: it will take more money to buy things with fixed values, such as stocks, real estate, gold, and even crypto assets.

What is the outlook for crypto assets?
This market correction and the pending recession remain an extreme test for crypto asset markets. The robustness apparent across the crypto asset markets is reassuring, demonstrating the wider adoption and recognition as a new alternative asset. In terms of regulatory developments, this crisis is increasing the dialogue around monetary and fiscal policy for digital assets, such as CBDC and crypto assets in general. The real impact remains to be seen. Incremental steps after Libra was announced include the PBOC news about CBDC testing, a handful of other smaller countries with digital currency plans, and even US politicians exploring the possibilities. In Europe, Christine Lagarde has spoken in favour of a digital euro, and that sentiment has intensified during the current crisis.

The integration of crypto assets into the wider investment spectrum could be accelerated by governments’ targeted spend in technology. Both creative new sectors and the ones hit hardest by this crisis have a new urgency to remove inefficiencies and costs, offering new opportunity for blockchain projects. This is comparable to the period after the dotcom bubble, when e-commerce changed the way the world shops. If this response brings jobs and opportunities, governments have an incentive to speed up the regulatory process and legitimise those businesses.

Against this wild backdrop, a halving for bitcoin block rewards is on the horizon in May, when the number of bitcoin entering into circulation drops by half. Bitcoin miners’ earnings are also effectively reduced by half. They will seek to lower operating costs to remain profitable with more efficient machines, larger scale operations, and lower-cost energy. They also supplement their income by verifying transactions and earning fees for it. This reduced supply should support the price of bitcoin over time. This occurred after the two previous bitcoin halving dates, although today, bitcoin trading volume is higher, adoption and knowledge is broader, and media reach around bitcoin is greater. It is possible that the appreciation impact will be priced in before the bitcoin halving, or that it will be negligible.

Short-term, our outlook remains cautious. However, with unprecedented actions from central banks, this is an interesting time to be active in the crypto markets. Recent correlation between crypto assets and traditional markets can be understood as a response to risk: to the extent that systemic negative economic news and uncertainty around coronavirus continues, the correlation will persist and volatility will remain elevated. We see signs that crypto assets are breaking out of this correlation already, with historic data indicating similar correlation shifts by bitcoin during dramatic S&P declines since 2013.

Our mid to long-term outlook for the crypto asset markets is bullish for two reasons: as the inflationary impact of today’s monetary and policy measures in a crisis become apparent, the potential for the crypto market grows. This scenario gave birth to bitcoin in 2009. The fundamentals of crypto assets, and the clearly defined monetary policy of bitcoin specifically, have not changed. Participation from institutional investors is expected to take some six months: time to recover in their current portfolio positions, analyse and research new alternatives including crypto assets, and then buy in.

Bitcoin may still prove itself as a store of value. As an alternative investment class, the value of crypto assets and bitcoin recovered significantly after March 12. Gold and silver also initially declined by over 10 percent and 30 percent respectively following the correction, and these traditional stores of value also recovered significantly. While the recent correlation between bitcoin and traditional asset classes has been a response to risk, averaged mid and long-term correlation is expected to remain low as bitcoin is not yet linked to economic output. Growing consideration for digital assets should continue, as the best-known one, bitcoin, just weathered a major test of its technical merits during this turbulent market activity.

What remains a constant: you can rely on us at the Crypto Finance Group for a professional, secure, and resilient gateway to the crypto asset markets. This means anticipating risk and updating our outlook continuously, particularly when news headlines can mean 24/7 crypto markets and bitcoin are the only place to express a specific trading view. We work closely with our clients at this key time to ensure proactive approaches in the crypto markets.

CRYPTO MARKET REVIEW – for the full review, read further here in the PDF report.