Newsletter 52: Safe Harbour

15 mins read

“I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed, is a reliable e-cash.” — Professor Milton Friedman, a Nobel Prize winner in economics.

This newsletter takes a look at what has happened with Bitcoin in relation to the equities market under the direct influence of Covid-19 and the “cold war” in oil production that followed. We then made observations on the impact these events have had on Bitcoin and the futures market.

 

The Perfect Storm

In a concerted effort to stop the spread of Covid-19, China implemented lock-down at ground zero in Wuhan on 23 January. They also restricted travel throughout the nation. This led to a lowering of China’s production output for both local and global economies. The shipping industry was then affected when South Korea became exposed. 

When Italy announced its skyrocketing figures of infected, traders and investors pulled out of the equities market. Concerns over a slowing global economy and diminishing profits quickly became apparent. On the week of starting 24 February, the U.S. stock market suffered the worst and fastest decline not seen since The Crash of 1929, just before the Great Depression. 

Saudi Arabia announced on 8 March it was going to ignore output limitations for crude oil. This would lead to plummeting oil prices. 

On the morning opening bell on 9 March [SP1], the Dow Jones suffered a 2,013 point drop. The largest single-day point drop at the time. On 12 March [SP2], a new record was made with the worst single-day point drop of 2,352 in history. 4 days later on 16 March [SP3], that record drop was beaten when the Dow Jones dropped by just 3 points shy of 3000 points!

On all of those dates the S&P 500 went through an unprecedented 3 Levels of circuit breakers in just over a week period.

 

The Perfect Storm for the S&P 500.

 

This led to a cascading effect all over the world with every major stock exchange diving to new record lows and triggering circuit breakers (where trading pauses and traders get a 15-minute break from the upheaval). For a Level 1 pause to be triggered, the S&P 500 has to see a 7% drop from the previous trading day’s close. A Level 2 stop is activated at a 13% drop and a Level 3 at 20%. A Level 3 circuit breaker suspends activity on the NYSE (and major U.S. exchanges) for the remainder of the trading day. All 3 levels were hit in under 2 weeks.

 

Safe harbour to wait out the storm

This week, the U.S.A was reported to have the largest number of infected in the world. At more than 83,206 reported infected, their trajectory, that of Europe and most of the world is exponential at this stage. Only China and South Korea have shown signs of improvement in the “flattening” of the curve of new infected cases. This means that even though major countries are only now implementing lock down procedures (such as India, Indonesia, U.K. this week), the virus will be rampant for at least the next 2 months. This is largely assuming that the effectiveness of lock-downs are as good as China and South Korea (it took them 2 months to flatten the curve). 

 

Flattening the curve by social distancing and staying at home.

 

Thus it is likely that Q2 will remain a turbulent period for healthcare and the stock market. For cash rich hedge funds, institutions, family offices and investors, this period will be an opportune time to seek out good entries in blue chip shares and private equity. This storm has created the need for businesses and investments to be resilient or versatile to cater for lock-downs, especially since Covid-19 outbreaks or similar would most likely appear over time in future. The need for business continuity in a climate such as this will be a new key question during appraisals by venture capitalists and private investors alike.

 

Venice, Italy. Before and After lock-down (Planet Labs)

 

No matter how great the storm, it eventually runs out of fuel, and the seas return to calm. At least with Covid-19 we can stave off infection by social distancing. At least with Covid-19 it is not airborne. At least with Covid-19, the mortality rate is relatively low at ~5%. 

 

Currently more than half a million are infected, with twenty-four thousand dead. World Wars have killed more people than this virus would even if up to a billion people were infected.

 

We will beat this virus, whether through starving it off hosts to infect or by way of vaccines or new medication. Regardless, just like AIDs changed the world and affected our social lives, Covid-19 will do the same. Perhaps there will be no shaking of hands for some time, or that it is only polite to offer wet wipes before a meeting begins. 

 

It is very likely that every office will have hand-sanitisers at all entry or exit points in future.

 

In real life, these gestures will more likely start a new way of life for many who have been used to the handshake.

Asian greetings now look extremely appropriate for this day and age

 

Not surprisingly, many have also been introduced to a new of life by continuing to complete their work through internet calls and online meetings. 

 

An example of a conference call for companies adjusting to WFH policies

 

For those in the blockchain and cryptocurrency industry, this is very much the norm. Everyday at BitOrb, we have a local Team Brief. Twice weekly, we have a global Team Brief. For us, operating and developing a 100% online business model with the BitOrb Exchange places us in a unique position to weather the storm and a safe harbour for investors-alike. By the time we launch the exchange, we should be back in office and ready to serve our trader clients. 

Bitcoin is by definition a decentralised currency that enables the people at large to be part of the financial industry. For many who are now having to experience a fully different way of life via online connectivity, will have an opportunity to learn about the benefits of a decentralised currency. When governments are implementing monetary policies to print more of their currency, this look at unlimited supply of monies re-emphasises the concept of Bitcoin. To have a limited asset that has value not controlled by government or politics, but by mathematics of global supply and demand is reassuring in these market conditions. 

 

Bitcoin was born as a result of the last financial crisis. Bitcoin will show its true colour in this one.

 

When we look at Bitcoin’s recent price chart, it is worth noting a few points that jump out. First, the lock-down in Wuhan was felt across the industry. Some might even say that it was considered a risk-off asset with an eventual rise in BTC prices. Of course with the year starting higher year-to-date and the halving of BTC rewards in May 2020, one could understand the price pump.

When the markets crashed around the world, we see BTC follow suit. However, the recovery of BTC prices was a stark contrast to what we have witnessed so far when compared to the stock markets. Analysts now believe that with the current cryptocurrency market capitalisation (< US$ 200bn) it is very likely that the sell off in BTC was due to hedge funds being margin-called and having to liquidate all if not most of their positions in Bitcoin. Prices are now held up by more retail investors and bitcoin mining operations.

 

 

We also know that a large crypto hedge fund was recently forced to cease operations due to massive losses as a result of their positions on digital assets. This led to liquidations and subsequent take profit sells. 

Immediately after BTC prices dived to just under US$ 4,000 on some spot exchanges(we saw the number of Bitcoin wallets holding more than US$ 10,000,000 dropped to less than 900), there has been steady but cautious (relatively low volume cf to H2 2019) acquisition of Bitcoin. This has led to the current price of US$ 6700, having tested strong resistance levels at US$ 7,000. Furthermore, the number of wallets holding more than US$ 10m has now increased to more than 1,100.

The circuit breakers had hit twice on the S&P 500 and we observe BTC prices holding steadily even though a Level 3 circuit breaker was activated on 16 March. Bitcoin prices continued to rise the very next day.

 

Within a span of a week, Bitcoin prices began to rally.

We know that traders took the opportunity to short BTC prices during the week starting 8 March. The Shorts were funding the Longs in exchange for their positions, and they profited heavily from it. 

At all 3 SP events, the futures market for Bitcoin was active with volumes surpassing more than US$ 10bn in a day on a single exchange. 

 

 

If the nett fee (minus market maker and less discounts and commissions) was 0.03% for an exchange then the revenue for that week using the volume such as depicted in the chart above, it would be approximately ~ US$ 12m.

 

Exchange Update: Roadmap Q2 2020 by 3 April!

With the time in Q1 spent mostly on debugging and extended development, the tech team is now able to finalise the roadmap going forward. We will begin with sharing the Q2 roadmap. With additional engineers on-boarded in recent weeks, the final milestones for launch will be achieved earlier.

by

Hoong-Teng Lim

27th March 2020

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