22
Mar
20

Coronavirus – Effect on the Blockchain and Cryptocurrency Market

We are currently living in unprecedented conditions. While we have gone through market recessions before, never have we faced a contagious global pandemic to this extent. The effects of the virus have been truly devastating. Dow Jones, the popular market index that tracks the 30 largest publicly-owned companies trading on the NYSE and NASDAQ, dropped by nearly 3000 points 16th March. For context, this is the largest single-day drop since the “Black Monday” crash of 1987. Obviously, this has had a massive impact on the blockchain space, as well.

 

The Effect of Coronavirus on Cryptocurrencies

 

#1 Effects on valuation

 

When the Dow initially began to fall, all eyes were on Bitcoin – and for very good reasons. Bitcoin was created from the ashes of the 2008 Housing Crisis. The idea was simple, build a decentralized digital coin that didn’t need to go through an intermediary, like a bank or any financial institution. Many thought that Bitcoin was going to be a safe haven asset, which would weather a financial storm. Unfortunately, that wasn’t the case this time around.

 

Let’s look at how BTC/USD acted between 14th February and 22nd March.

 
this image shows the decline in price of bitcoin during the coronavirus crisis.
Image Credit: FXStreet
 

In this one month time period, BTC/USD plummeted from $10,382 to $5,171.15. That’s a little more than a 50% drop in one month! However, just looking at Bitcoin isn’t enough. Let’s look at how the cryptocurrency market, in general, behaved in the same time period.

 
This image shows the decline in total market capitalization during the coronavirus crisis.
Image Courtesy: Tradingview.com
 

As you can see, between 14th February and 14th March, the total marketcap of the market fell from $300 billion to $144.69 billion! That’s a ~51.75% drop, which is pretty similar to Bitcoin’s price action.

 

However, as you can see in the BTC/USD chart, the market has started to recover post 13th March, so the market may yet swing to the bullish side.

 

#2 Long-term effects

 

As mining becomes less profitable, it could become exceedingly dangerous for proof-of-work coins, aka, coins that require GPU or ASIC mining. Let’s look at some charts from BitInfoCharts. The following is Bitcoin’s hashrate chart over the last three months. As you can see, the hashrate was holding relatively steady till 8th March, when it suddenly dropped off.

 
this image shows the decline in bitcoins hashrate during the coronavirus pandemic
 

In fact, the last time that the hashrate was trending so low was back on December 24th, 2019. There are two big reasons behind this drop in hashrate:

 

  • The price of Bitcoin went down, so it became less profitable for miners to mine.
  • A huge majority of Bitcoin’s mining pools are in China. Because of the Covid-19 lockout, they weren’t able to optimize their rigs properly.
  •  

    So, while Bitcoin has been devastated, we can safely say that it will eventually recover itself with time. Bitcoin, after all, has a thriving community and it’s still the king of all cryptos. However, the backlash effect is going to be felt by other smaller POW coins. Since they will no longer be profitable, miners will escape en-masse. As such, those coins will be dominated by mining cabals who can launch multiple 51% attacks on their protocols. That’ll pretty much be a death-knell for these cryptocurrencies.

     

    Now, let’s shift our focus to blockchain companies? Will they be able to weather the storm?

     

    The state of blockchain companies

     

    Looking at the current landscape, blockchain companies fall under the following categories:

     

  • Young startups.
  • Established startups.
  • Legacy companies.
  •  
    Young startups
     

    For startups that are just a few months old, they may have to face some insurmountable odds. Several startups in the market are looking for investors. Unless they are genuinely exceptional projects, it will be hard for them to get any sort of funding in this climate. As such, it may work in their favor to delay operations for now and pick up the pace later. However, be on the lookout for startups that weather the storm and come out strong in the end. They are going to be real winners.

     
    Established startups
     

    These are the startups that have been around for a while and have earned solid reputations. These are much better equipped and have the finances needed to survive the current bear market. In fact, they are actually in a unique position to thrive in the current ecosystem.

     

  • First, they don’t need to put in the grind and physically meet people in conferences all around the world to spread awareness. Their brand already has name value.
  • Plus, due to Social Distancing, any potential competitor who isn’t that well-known, will not be able to make their presence felt in their markets.
  • Established startups will also want to work together and partner up with other established startups, instead of going with a young startup.
  •  
    Legacy Companies
     

    So what about legacy companies that are working on blockchain solutions? Well, since they are mostly in a POC state and not integral to the company’s operations right now, they may be put on hold. The whole “work-from-home” scenario has thrown a monkey wrench in their daily operations and they must learn how to remotely work as a team before they can even do anything, let alone work on an innovative project like the blockchain.

     

    Conclusion – Is it all doom and gloom?

     

    Usually, when the crypto market goes through a crash, it is seen as a positive thing in the long-run.

     

  • It removes all the unnecessary hype and brings us back down to reality.
  • Cleanses the crypto space of all the fraudulent or weak projects that are not backed up by solid principles.
  • Only the strong projects which are bringing in some real utility into the market will be able to survive the downward spiral.
  •  

    As TOP Network’s CMO, Noah Wang, put it, “I personally believe that a bear market is required to bring the hype down and inject some much needed common sense back into people. During a ‘bubble period,’ non-deserving projects and bad coins get immensely overvalued due to endless speculation. Right now, markets and investors will have to focus on projects that have real technology and potential.”

     

    Currently, the situation is both challenging and exciting. We may see a lot of projects and coins fail, however, the ones that will make it out, in the end, are the ones that should’ve made it to the top anyway. Regardless of the situation, the cream will always come rise to the top.

     

    Do you want to learn more about Bitcoin? Check out the ultimate Guide here

    Rajarshi Mitra
    Blockchain Researcher