In the last few hours, we seem to be reliving the COVID-19 crash of 2020. Could the market restart after central bank intervention, as it did four years ago?
Over the past few days, fear has reigned in the crypto market, which has collapsed along with the stock market. During yesterday’s day, Bitcoin lost more than 15% of its value in less than twenty-four hours, while the NASDAQ and the S&P 500 lost about 5% and 3%.
The week of 9 March 2020, the markets were shaken by a similar event, albeit characterised by a more pronounced bearish movement. At that time, the collapse was caused by the outbreak of the pandemic and the adoption of lockdown measures by most of the world’s countries.
Look at the Bitcoin chart
Yesterday’s bearish movement, however, seems to have stemmed from a much broader spectrum of factors: the escalation of the conflict in the Middle East, the Japanese Central Bank’s cut in interest rates, and the consequent collapse of the Nikkei, the country’s main stock market index. Then, the crisis of US technology companies and the fear of an economic recession in the US were accentuated by the latest unemployment figures.
What are the similarities between these two market crashes? Not so much in terms of the causes and price movements that have already taken place as in terms of the possible responses of central banks and the associated price rebound.
Crypto market collapse: key figures
Yesterday’s crypto market crash was the most violent since 2022. The Crypto Total Market Cap, the total market capitalisation of cryptocurrencies, fell to $1.7 trillion at its most critical moment, registering a 15% drop. If we analyse the performance from the end of July onwards, the market capitalisation of the entire sector faced a 30% reduction due to the massive wave of liquidations.
The positions of many traders were forcibly closed, with a monetary counter-value of about $1.07 billion on centralised exchanges. The total value of those swept away on-chain, on DeFi protocols such as Aave or Curve, was around $350 million. Finally, the founding rates for Bitcoin and Ethereum futures turned negative. This means most investors have positioned themselves short and are betting on a further price collapse.
Exploits Bitcoin’s Bearish Movement
Some have dubbed yesterday, perhaps exaggerating, ‘Black Monday’, a profoundly negative day comparable to those of the pandemic era. Despite this, however, referring purely to the future scenario concerning the crypto market, it may not be the case to despair too much. There are several reasons to be cautiously optimistic about the future. For instance, the price performance of the most important cryptos in recent hours and the possible impact of an early rate cut by the Federal Reserve (FED), which is becoming increasingly likely.
Covid Crash: price movements
To analyse the current scenario, it may be useful to compare the current situation with the crypto market in 2020. At that juncture, in just a few days, the crypto market lost almost 50% of its total value. The crypto total market cap went from $228 billion to $118 billion, the price of Bitcoin went from $8,000 to almost $4,000, and Ethereum went from $270 to less than $100. Similarly, the performance of the stock market was also affected by the arrival of the pandemic. The S&P 500 lost about 35% of its value in less than a month, while the NASDAQ lost 30%.
In the months immediately following, however, the market rebounded strongly, mainly due to the expansive monetary policies adopted by all the major central banks, which we will discuss in the next section. The price of Bitcoin, in the following 52 weeks, recorded +1,400%, or more than a x10. On the other hand, Ethereum rose by +1,500%, rising from $110 to $1,800, reaching its all-time high at $4,700 the following year. It was the same for the stock market, although the movements were much smaller in percentage terms. A year later, the S&P 500 and the NASDAQ almost doubled their value (+89% and +90%). Could we see the same scenario in the coming months?
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In short, the ‘Covid Crash’ was a launching pad that allowed all assets to restart strongly after their respective corrections, but what was the petrol that allowed the engines of finance to restart?
The response of the central banks
As mentioned in the introduction, the most exciting part is not the price movements of the main assets but what happened afterward, i.e., the central banks’ response to the situation. This is because the main issues that caused these violent corrections seem similar.
On 12 March 2020, the Governing Council of the ECB (European Central Bank) implemented a package of monetary policy measures aimed at “supporting liquidity and financing conditions for households, businesses and banks and helping to preserve the smooth supply of credit to the real economy”. Then, on 18 March, the European Union announced a massive Quantitative Easing measure, i.e. an unconventional policy action to increase the supply of money in circulation, the Pandemic Emergency Purchase Plan (PEPP). The PEPP injected some EUR 1,850 billion into buying public and private bonds from March to December. Adding this figure to those of the other measures, such as the Targeted Longer-Term Refinancing Operations (TLTRO) and the Asset Purchase Program, launched in September 2019 at the end of the Draghi era, brings the total to almost EUR 3 trillion mobilised by the ECB over three years.
On the other hand, the FED, to stimulate the economy and shelter itself from the risk of recession, immediately cut interest rates, a measure that the ECB could not implement given that European rates had already been zero since 2016. Then, the FED continued with Quantitative Easing policies. It is estimated that the FED injected more than $3 trillion into the economy in the immediate aftermath of the pandemic.
What can happen in the coming weeks?
Is the recent crypto and stock market crash a sign that what happened in 2020 could be repeated in the coming weeks? According to most economists, this is possible since the latest US employment data show that the economy is weakening and the risk of a recession is growing.
Leading macroeconomic experts expect an extraordinary meeting through which interest rates will be reduced, at least as far as the US ‘front’ is concerned. For example, Austan Goolsbee, president of the Chicago Federal Reserve, stated in an interview with CNBC that the Fed is ready to intervene if the US economy deteriorates. The first sign of this came with the latest unemployment figure, which was worse than expected (4.3% instead of 4.1%). Even Elon Musk commented on this, calling the US Central Bank ‘foolish’ for not yet cutting interest rates, as the ECB has already done.
However, the differences from the pandemic period must be noticed too, especially about the size of the crypto world and its degree of adoption. In 2020, the sector’s total value was 10% of today’s, and the world’s most significant investment funds had yet to join this market.
In conclusion, the current macroeconomic scenario is similar to that of 2020. Can the conflict in the Middle East, the ‘recessionary danger’ caused by more than two years of severely restrictive policies, rising unemployment, and the crisis of technology companies compose a sufficiently strong motive to push global economies to reignite?
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