HEALTH CRISIS 2020 WHAT ARE THE IMPACTS ON GLOBAL ECONOMY AND ON THE CRYPTOSPHERE?

FIRST HALF OF 2020

ECO-CRYPTO ANALYSIS

Published on August 10, 2020

Overview

      During the first half of 2020, the global economy has experienced significant upheavals. The health crisis and the political decisions taken in order to face the COVID-19 crisis quickly led to panic reactions in the financial markets and had a direct impact on the real economy. A severe economic downturn is expected in 2020. 

 

      The purpose of RR Crypto is to clarify what happened and to describe the economic, monetary and financial aspects of cryptocurrency by throwing light on the global economic repercussions since last March and on their impact on the cryptocurrency markets. Our team hopes that this review will help everyone to better understand the challenges faced by the cryptosphere. Even though it is independent from traditional financial markets, human reactions and institutional decisions have an impact on this ecosystem in the difficult economic situation of 2020.

Finally, we will make some predictions about the rather positive evolution we are expecting in the cryptocurrency sector in the future.

NB: We advise that this article is a non-exhaustive analysis of recent economic outcomes. RR Crypto carried out this paper relying on external sources such as international organizations, national and international press and on internal sources such as the analysis and experiences of our trading team for all informations related to the cryptoassets market.

 
An unprecedented Global financial crisis

The 2020 health crisis and its related political choices have thrown the world economy in a completely unprecedented situation.

 

The stock market crash

On March 12, 2020, the direct impact of the health crisis on global supply chain and the lockdown in China caused a wave of panic on traditional financial markets. Stock market investors began to sell a massive amount of their titles leading us to an historic crash. The main stock market indexes of the world have slipped by 30 to 40% in only 2 weeks![1]

Economic shocks

The legal measures taken in order to deal with health fears have led to a rare double economic upheaval: we are facing both a supply and a demand shock. 

The supply shock was caused by the lockdown measures which pushed many companies to slow down or stop their activities during several months between the end of January and mid-May depending on the country. As for the demand shock, it is obviously linked to the collapse in consumption due to travel restrictions over the same period. In a situation of decline of the economic exchanges, we have entered a real recessionary spiral.

A global recession

The International Monetary Fund (IMF) reports the world's first recession since 1945, and prepares for the worst economic downturn since the Great Depression of 1930.[2] The global GDP growth rate is estimated at - 5,2 % in 2020.[3] According to the World Bank, the worst economic downturn would affect the eurozone, with an expected rate of - 9.1% for this year. In France, the data released by the IMF in June predicted a decline of 12.5% of the GDP.[4]

 

 

 

[1]Philippe Alezard. « Marchés boursiers, attention danger ». Contrepoints, 14 avril 2020, www.contrepoints.org/2020/04/14/369070-marches-boursiers-attention-danger.

[2] « Coronavirus : le FMI prévoit la pire récession depuis 1930 ». Courrier international, 21 avril 2020, www.courrierinternational.com/article/crise-coronavirus-le-fmi-prevoit-la-pire-recession-depuis-1930.

[3] « Perspectives économiques mondiales, juin 2020 ». World Bank, 8 juin 2020,

www.banquemondiale.org/fr/news/press-release/2020/06/08/covid-19-to-plunge-global-economy-into-worst-recession-since-world-war-ii.

[4] « IMF Country information : France ». International Monetary Fund, mis à jour le 22 juillet 2020,

www.imf.org/en/Countries/FRA.

States response: recovery plan and increasing of the money supply

To face this severe recession, the States warned central banks and launched support and recovery plans reaching amounts never seen before, not even during the 2008 crisis.

 

Liquidity injection

As of March 27, 2020, the United States adopted a massive rescue plan of $2.2 trillion to save the economy.[5] The equivalent of France annual GDP! Added to this, the support from the Federal Reserve (FED) which offered unlimited amounts to American banks through the sale of securities and emergency loans gathered in programs that can amount to a total $ 4.5 trillion. In the same way in Europe, the European Central Bank (ECB) released 120 billion euros on March 12 to allow banks to continue granting loans to individuals and businesses, in addition to the 20 billion euros monthly issued since November 2019.[6] And to all this is added a historic recovery plan of 750 billion euros approved by the Member States of the European Union on July 21.[7]

 

Supporting the demand

The objective is to support the demand. The population must of course have the means to consume again. Hence, for example, the aid of 1200 dollars given to American citizens, in a country without social safety net and where unemployment has been increasing since the beginning of the health crisis.[8] As well as the short time working arrangements in France[9]

 

 

Avoiding a banking crisis

The objective is also to cope with the lack of liquidity and to avoid a banking crisis. The increase of money supply aims to avoid as much as possible interruptions of payments for individuals and businesses, which would burst consumer debt bubbles and cause bank failures. In France, during the lockdown, the government has implemented financial aid measures such as government back loan guarantee schemes and immediate exceptional aid for small businesses and freelancers.

 

As you can well imagine, the monetary policy of the most influential economies in the world has reached new heights in response to the crisis. Central banks are printing more money to meet the needs of economic agents (governments, banks, businesses, etc.) This translates into loans granted to banks or assets repurchases such as treasury bills, sovereign debt securities, corporate debt, etc.

Whatever financial instrument is used, the result is the same: more and more money is injected into the economy to alleviate the lack of liquidity and avoid an exponential worsening of the global economy.

 

 

[5] « Coronavirus : Trump signe le gigantesque plan de relance américain ». Les Echos, 27 mars 2020, www.lesechos.fr/monde/etats-unis/coronavirus-trump-signe-le-gigantesque-plan-de-relance-americain-1189805.

[6] « La BCE impose son indépendance, la Fed ouvre les vannes des liquidités ». Les Echos Investir, 29 avril 2020, https://investir.lesechos.fr/marches/actualites/la-bce-impose-son-independance-la-fed-ouvre-les-vannes-des-liquidites-1906047.php

[7] « Macron et Merkel arrachent un accord de 750 milliards pour relancer l’Europe ». La Tribune, 21 juillet 2020, www.latribune.fr/economie/union-europeenne/macron-et-merkel-arrachent-un-accord-de-750-milliards-pour-relancer-l-europe-853186.html.

[8] Lauren Aratani. « $1,200 stimulus checks for all ? What to know about the US coronavirus bailout ». The Guardian, 1 juillet 2020, www.theguardian.com/world/2020/mar/23/coronavirus-us-bailout-what-you-need-to-know.

[9] Voir les diverses mesures d’urgence en soutien aux entreprises sur :

https://www.economie.gouv.fr/covid19-soutien-entreprises/les-mesures

Dollar depreciation: Definition and causes

We have seen a significant deprecation of the US dollar (USD) on the foreign exchange market between the end of March and the end of July 2020. In other words, the dollar has lost value against other currencies such as euro (EUR), pound sterling (GBP), yen (JPY), Canadian dollar (CAD), etc.  As of March 31, 1 USD was worth 0.90 EUR, compared to 0.84 EUR on July 31.[10] For information, over the past two years, the USD/EUR pair has fluctuated between a low of 0.84 and a high of 0.93[10].

Why does the dollar tend to depreciate in the markets? 

 

 

Monetary growth

First of all, we note the impact of expansionary monetary policy. This year, FED has become the central bank with the most important balance sheet in the world with a record of 7 trillion dollars.[11] The sharp rise in the amount of dollar currency printed means that a dollar per unit is worth less than before. This is the law of scarcity in economics: the more a good is available on a market, the more it loses value. Conversely, the rarer it becomes, the more it increases in value. Hence a depreciation of the dollar against other currencies which, in comparison, have been printed in smaller quantities since the start of the crisis.

 

 

Key rates reduction

Another measure was FED lowering its key interest rates to almost zero in March[6] in order to stimulate growth. This allows commercial banks to lower their interest rates, the currency becomes cheaper, but as a result the dollar depreciates.

 

Fall in oil prices

The US dollar has also suffered from the collapse of crude oil price as their values are partly correlated.[12] This is why the petrodollar is used to describe the revenues, expressed in USD, coming from the oil sold by petroleum exporting countries.

 

 

Dollar shortage

Finally, the dominance of the US dollar on the international scene turns out to be a disadvantage in times of crisis. The dollar is the main reserve and exchange currency in the world: it represents 60% of official[13] foreign exchange reserves, and about 50% of the world trade is carried out in USD [14]. This therefore reflects a great dependence of the markets on the dollar, which is currently a problem. Global production and trade have dropped drastically with the lockdown measures causing a huge global dollar shortage that is undermining confidence in this store of value.

 

 

[10] « EUR per 1 USD - Past year ». XE.com Inc., 31 juillet 2020 (Actualisation quotidienne),

www.xe.com/currencycharts/?from=USD&to=EUR&view=1Y.

[11] « Federal Reserve Board - Recent balance sheet trends ». Board of Governors of the Federal Reserve System, 28 juillet 2020, www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm.

[12] « Le dollar pâtit de la chute du pétrole, le rouble s’effondre ». Le Figaro.fr, 9 mars 2020,

www.lefigaro.fr/flash-eco/le-dollar-patit-de-la-chute-du-petrole-le-rouble-s-effondre-20200309.

[13]  « Currency Composition of Official Foreign Exchange Reserves (COFER) », IMF, 30 juin 2020,

https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4

[14] Jie-Hui Lim, Delphine Masquelier, Wim Raymaekers, Astrid Thorsen. « Worldwide Currency Usage and Trends », Swift.com, Avec le soutien de la Ville de Londres et de Paris Europlace, Décembre 2015, p. 7. Disponible sur : https://www.swift.com/sites/default/files/documents/swift_bi_currency_evolution_infopaper_57128.pdf

Reactions and developments in the cryptocurrency sector

How did this vast health, economic, monetary and financial crisis impact the cryptocurrency industry throughout this first half of 2020? And what are the prospects for the future?

 

A turbulent month of March for all financial assets

Regarding cryptocurrency and mainly the market leader, the Bitcoin, the fall of March 12 is mainly explained by the investors quickly pulling out liquidity from the market leading to a sharp drop. Altcoins followed Bitcoin trend since its market cap and dominance weighs considerably on the market. 

This fall does not question the future of crypto projects nor the sustainability of Bitcoin nor the fundamental interest of market players. We also noticed that the institutional safe havens such as gold fell during this period

 

 

The event of March 12: progress and explanations

With the health crisis, assets were becoming uncertain and market players began to panic so they decided to exit their position. Funds withdrawal to switch back to stablecoin, euro, dollar generated voids in the order books and the price fell suddenly and sharply.

Proof of Bitcoin's strength is that the stall was halted on a major and historic support at around $ 4000.

After this event, only a little liquidity was present in the order books and the price became very volatile, which generated movements of an amplitude of 30%, upwards or downwards, extremely difficult to control and very risky to take. It should be noted that the traditional technical analysis does not suit this sector.

It will not be until the end of March - beginning of April that the confirmation of stabilization and the regular entry of new liquidity will be made. It was followed by an increase in the price of Bitcoin to reach a large lateralization between 8 500 USD and 10 000 USD which lasted more than 60 days.

 

 

Our fundamental analysis

We believe that a new cycle has started. Given what occurred in the cryptocurrency world over the past few weeks, we have noticed the emergence and fast development of the Défi projects for "decentralized finance" and of other areas specific to the cryptosphere related to data protection, security, decentralization, etc.

We keep a close eye on everything happening at a fundamental level and until now, positive news keep being published: system updates, goals set in white papers achieved, launch of innovative projects, partnerships, etc.

 

Our technical analysis

Technically the charts indicate that we are still in the beginnings of a new cycle even though some Altcoins have scored very interesting performances in recent weeks.

In trading terms, we focus our analyses on Big and Mid Cap, that is to say, the cryptocurrencies with the highest volume traded. The reason for this is that when we enter a position with a certain capital, it is imperative for us to be able to exit quickly and at the set price if the market does not confirm our analysis. However, we also need to benefit from the power line communication driving the prices up.  Thereby, everything that was bought must be sold with a higher volume. Working on Small Cap is not excluded but in order to avoid any mishap the position sizes are proportional to the volume processed.

 

What are the prospects for the future?

We cannot predict the future with any certainty; however, we have collected, carefully analysed and gathered several clues that lead us to believe that cryptocurrencies will soon reach a new level.  We like the comparison with the internet: thought of in the 60's, created in the 90's, adopted in the 00's and totally essential since 2014. The current feverish and uncertain global economic and financial situation is beneficial to the cryptosphere. More and more people are learning the world of cryptocurrencies.

At this time - July 30, 2020 -, Bitcoin has broken a historic resistance of 10 500 USD for several months. A weekly close above this price would give us a first signal that the underlying trend is starting to be bullish on Bitcoin. Further movement may bring us closer to the  12 500 USD level. 

However, there still is a resistance of 14 000 USD on the way which, if broken, would bring us back to the ATH, or "All time hight" for the highest level ever recorded that was around 19 000 USD.

Altcoins mostly form the low market structures, or "bottom" in our jargon, on relatively large time units, with indications that the volumes traded are attractive. For some of them, the fast increases that happened in the last few weeks are a rise in historical resistance.

Advanced tools allow us to see that a lot of Bitcoins have been pulled out of the exchanges to be placed on private keys.  Therefore, the supply decreases which creates scarcity.  And as we have seen before in the depreciation of dollar analysis, what is rare is likely to increase in value !
 

It should be noted that the dollar depreciation has a direct impact on the stablecoin USDT against euro.  The USDT is not losing strength but the dollar lost 9% of its value since March 20.

Basically and technically a decline in the dollar means a rise in precious metals and therefore of the Bitcoin as it may have been in the past. We remain very attentive to the levels affected by the dollar index.

Conclusion

To sum up, the world is facing a rather serious and unprecedented situation in the history of the economy.  Since last March, the health crisis impacts have been visible in the real economy with a sharp trading slowdown - production and consumption - and in the financial markets with a drop in stock market prices and in the value of many crypto-assets. The US dollar, a global reserve currency has been showing signs of weakness as well. 

      Regarding the cryptocurrency ecosystem, the impacts are milder than in other economic sectors due to the decentralization of blockchain registers which provides the market with a strong confidence potential.  Of course, the development and establishment of the new economic cycle takes time, but strong signals are coming one after another, and the crisis we are currently experiencing is favouring the development of cryptoassets.

In conclusion, we are picturing a bright future for cryptocurrency! Market players recovered strongly from the shock experienced last March, that confirms the power of crypto projects and therefore good prospects for the future!

GLOSSARY

FED or Federal Reserve : it is the central banking system of the United States of America.  It establishes the monetary policy and its duties are to ensure economic growth and full employment. It is independent from the US government but answers to the Congress. Its headquarters are in Washington.

 

ECB or European Central Bank : it is the monetary institution of the European Union in charge of the economic and monetary policy of the euro zone and of the stability of the currency. Its headquarters are in Frankfort, Germany.

 

Liquidity (or money supply) : it refers to the available money circulating on the real economy and on the financial markets, whether in the form of cash (notes, coins, etc.) or of digital money on bank account lines.  The amount of new liquidity injected in the economy is currently exploding further, thus strengthening quantitative easing monetary policy.

 

Quantitative easing : it is a form of unconventional monetary policy in which assets and debt securities are repurchased from financial players (Treasury bills, corporate bonds, mortgage securities, etc.) The ECB's QE between March 2015 and December 2018 rose to 80 billion euros per month. But today, it goes even further with the crisis we are experiencing in 2020. 

 

Depreciation : It is the observation of the fall in the value of a currency on the foreign exchange market.  As opposed to appreciation (currency strengthening) it occurs when a currency weakens.  Currently the USD is depreciating against the EUR, and the EUR is appreciating against the USD.

 

Devaluation : it is the official drop decided by a state in the value of its national currency.  It is therefore the result of a decision made by the monetary authorities, for example to increase its export competitiveness.

 

« USD » : it is the international standard code to represent the United States dollar, according to ISO 4217. These abbreviations are widely used in the financial sector, on the foreign exchange, stock exchange and cryptocurrency markets.  For instance, EUR stands for euro, JPY for Japanese yen, CAD for Canadian dollar, GBP for British pound, CHF for Swiss franc, etc.

 

Key rates : these are the interest rates set by a country's central banks or a monetary union, setting up the borrowing cost for banks looking to build up liquidity. It can be considered as a barometer of credit cost.

In this time of crisis, key rates are set at very low levels in order to encourage the demand through credit, thus promoting the regrowth. 

 

Altcoins : these are digital assets based on the blockchain technology and whose name come from “alternative coins”. They refer to all cryptocurrencies other than Bitcoin.

 

Fundamental analysis : it is an analytical approach which studies the evolution of the general economic health of cryptocurrency and its actors as well as the relevance and sustainability of the projects involved in the cryptosphere.

 

Technical analysis : is an analytical approach on the study of charts based on technical tools that are specific to trading (Bollinger bands, candlesticks, Ichimoku indicator, RSI (Relative Strength Index, and many others).

 

« DeFi »or decentralized finance : it refers to all the financial products and services developed on the blockchain. They are decentralized services allowing users to have direct control over their funds.

 

White paper : in the world of cryptocurrency, it is the roadmap of a project, published by its initiator. It describes the general objective of the project and the means used to achieve it.

 

Blockchain : it is a new technology that has been evolving since 2009 and that allowed the emergence of cryptocurrencies. It is a distributed digital register that belongs to its users and enables peer-to-peer exchanges. It is a means of purchase and sale of cryptoassets without the need of a central control body whereas in currency exchange, economic actors need to go through central and commercial banks as trusted third parties.

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