How Crisis Affects Crypto: Coronavirus as a Test Case
73 Pages Posted: 23 Mar 2020 Last revised: 10 Feb 2021
Date Written: March 22, 2020
Everyone is talking about the Coronavirus (a.k.a. “COVID-19”). What began as a local health situation in China has swiftly become a global epidemic, causing havoc and mayhem all around the world. The damages caused by the virus are overwhelming and will, in all likelihood, have long-term implications for the global economy. Naturally, the traditional financial markets are responding negatively to the news about the virus and share prices are nosediving. However, there are other implications of this crisis, which are perhaps less obvious but equally important. One such implication relates to the cryptocurrency market. In fact, this crisis provides us with the first opportunity to investigate an intriguing question: How does a global crisis, such as the one caused by the Coronavirus, affect cryptocurrencies?
On the one hand, cryptocurrencies are supported by a decentralized mechanism, which is independent of governmental functions and available anywhere in the world. Thus, people may respond to the threat of global instability by switching from traditional currencies to cryptocurrencies. On the other hand, cryptocurrencies may be both tightly related to economic activity and, due to lack of sufficient regulation, subject to manipulations by sophisticated investors, so that they cannot escape the fate of traditional markets. Analyzing data on the top 100 cryptocurrencies in the market, we find that the inflow of identified Coronavirus cases is, on average, positively associated with the market cap and trade volume of cryptocurrencies. However, we also find that an opposite trend emerged once Coronavirus cases began to accumulate, eventually leading to a decline in the cryptomarket. Given our findings, we discuss insights on how one can improve the regulation of cryptocurrencies to account also for times of crisis.
Keywords: Coronavirus, Cryptocurrencies, Financial Regulation, Financial Crisis
JEL Classification: E44, E52, G01, G14, G18, K22
Suggested Citation: Suggested Citation