Cryptocurrency, like Bitcoin, is an extremely new technology and financial asset, that hasn’t truly yet become widely adopted or proven its use case. The disruptive new fintech has incredible potential that could revolutionize the future of finance, but only if a black swan event doesn’t come along and send it to an early grave.
But that black swan event may be here in the form of the coronavirus. It’s already causing traditional markets to collapse, and the high-risk cryptocurrency asset class may be next to experience a panic-induced selloff of cataclysmic proportions.
The Coronavirus Has All the Signs of a Black Swan Event
Bitcoin and the technology powering cryptocurrency assets was born from the last major economic recession.
Newspaper headlines referencing the bank bailouts during this time are even referenced in Bitcoin’s earliest blocks.
Recession-proofing Bitcoin was among the creator’s key design attributes, and include a hard-coded, digital scarcity, and a regularly scheduled reduction in supply.
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And although the cryptocurrency certainly is equipped to withstand the collapse of fiat currencies, and perhaps provide a flight of safety for capital to flow into, the asset class may simply be too young at this point to withstand a black swan event.
A black swan event is a term popularized by finance professor and former Wall Street trader Nassim Nicholas Taleb, who authored a book on the 2008 recession.
Black swan events are cataclysmic events that completely unpredictable and unpreventable, and grave consequences due to how the event takes the world by surprise.
This is what they would call a Black Swan event.
— Michael Arrington (@arrington) March 3, 2020
The coronavirus in just a few short months went from an unusual, yet severe respiratory ailment, to a widespread pandemic on the verge of collapsing the economy.
Transportation, a key factor in the function of any economy, has been restricted, and production and many of the world’s largest manufacturing facilities have declined as a result of the virus spreading.
The death toll is sending investors into a downward spiral of panic, which prompted the largest one-week decline in the stock market since the great recession.
Can Cryptocurrency Survive Its First Recession?
If the stock market is tanking, and investors are selling off their assets in a complete panic in an attempt to cash out while they still can and de-risk from further decline, what might a similar selloff do to cryptocurrencies like Bitcoin should the fears hit the crypto market in the same way?
Compared to the stock market, cryptocurrencies are just a flash in the pan in terms of overall capital invested and liquidity. A massive, panic selloff in crypto markets would likely not have enough liquidity to accommodate every person seeking to cash out.
Last three emergency rate cuts of 50 bps:
— Ryan Selkis (@twobitidiot) March 3, 2020
The selloff could crush prices completely, to the point of no return.
Even key crypto market executives such as Matthew Hougan, the vice president of research and development at Bitwise warns that a black swan event is possible in the cryptocurrency space.
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Examples of the type of black swan events that could interfere with the longevity of cryptocurrency include overly aggressive regulation, exchanges going under, or massive breaches of underlying blockchain networks.
But remember, black swan events are typically unpredictable, and among the scenarios crypto investors likely never saw coming, is a pandemic wiping out their life savings and putting their lives at risk.