Coronavirus impact on Bitcoin price – What’s next?

What will be the impact of Coronavirus on the Bitcoin price? Let’s look first at what is happening  – coronavirus has caused by the time of writing 310’000 infections and 13’000 deaths. In parallel, the stock markets have crashed worldwide, here is the S&P Index since the 2008 financial crisis:

S&P 500 - the last 10 years
S&P 500 – the last 10 years

In parallel, the Bitcoin price has crashed as well. This might sound un-expected because Bitcoin has been classified as a safe-haven asset.

This article analyses what’s behind the Bitcoin price crash and what will be the impact of Coronavirus on the Bitcoin Price.

  • Current status of the stock markets and the monetary environment
  • What will happen next with the stock markets?
  • Bitcoin Price analysis
  • What will happen next?

So, we will look at the ”WHY” question? And we will then look at ”WHAT’s NEXT”?

Analysis of current stock markets and monetary environment

The stock markets have been waiting for a crash for several years.  There have been some incidents on the markets, but the central banks have absorbed them with their standard tool. They will create more base-money and patch with the newly created base-money any blow off’s on the market.

Let’s look at the repo crisis as an example. It started in September last year and culminated in December last year. The response from the Federal Reserve was to use their standard tool again – they printed massive amounts of base-money. They succeeded.

Central bankers’ understanding of the networked financial markets is much better than it was during the Lehman crisis in 2007/2008. Central bankers were prepared for everything except a black swan of the Coronavirus.

The declaration of the worldwide pandemic by WHO, the lockdowns, and the fear of people became the black swan event. Of course, the central bankers responded with their usual toolset (create more base-money), but they were not prepared for the scale of this event.

However, the big difference between this crisis versus the Lehman 2007/2008 crisis is the following – Lehman crisis was a monetary crisis, which could be fixed with freshly created base-money and fiscal stimulus from the biggest economies.

Our current event is not a monetary crisis, it’s a shock on the supply lines – the internetworked economy cannot deliver if just-in-time delivered parts are not available. And because of the supply shock, we get the demand shock on the economy, which leads to the deflationary environment.

As the demand is declining, then the revenues of the companies will start to decline too. This leads to the decline in their earnings, which will then lead to the decline of their stock price. That’s the logical reasoning of the current stock market crash. The decline of the anticipated revenues is the primary effect.

The quantitative easing (the creation of the new base-money by the central banks) has created in the last 10 years an army of the zombie companies. These companies are not able to cover their capital costs in the normal interest rate environment, their operational revenues are too small for this. These companies can exist now only in the current very low-interest-rate environment. If their interest rates would grow or if their revenues would decline, then they will end up in the bankruptcy.

The interest rate for the corporate credit will start to grow – because the banks are aware of the situation of the zombie companies, so the banks just start to charge more interest (higher risk premium). We will get a situation, where banks will start to give less credit to the economy, which results in the continuous defaults and bankruptcies of the zombie companies.

What’s next with the stock markets?

Money printing and fiscal stimulus has started

Federal Reserve has announced 2.206 trillion USD base-money creation, which is in total 59% of Federal Reserve’s balance sheet till now. ECB has announced 0.75 trillion EUR base-money creation. They call it a “package” or “liquidity injection”, but in reality, it is new base-money creation.

In total, 40 central banks have reduced their base interest rates or have launched their next base-money creation programs. This will be pushed into the economy through the banks, however, as the balance sheets of the banks will deteriorate, then we doubt that banks will help push this newly created base-money into the real economy.

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In parallel, the biggest OECD countries have launched the fiscal stimulus programs in the size of 5% – 15% of the GDP. This will be in the form of direct supports to some industries (airlines) – we think this is a very bad idea. The government should rather nationalize the airlines and later privatize them. Or this will be in the form of guarantees for the borrowers. However, we do not know how long the lockdown’s will last, and neither we do know how fast the economy can be re-started.

Zombie companies start to fail

We think these initial programs of central banks base-money creation and fiscal stimulus programs will fail. The base-money creation will not be enough to motivate the banks to create new credit-money via lending. This will result in the credit crunch, which will trigger defaults and bankruptcies. The fiscal stimulus programs will only prolong the existence of zombie companies.

However, stimulus programs will not solve the issues of zombie companies. Their key challenge is too high fixed costs, too low revenues, and too high debt. The corporate credit starts to increase, which will lead to the defaults and failures of the zombie companies.

The failure of the support packages means the secondary effects of the failing zombie companies will start and these effects will create holes in the banks’ balance sheets. This will further reduce the banks’ capability to lend. This means the banks will push less credit into the economy, which means real interest rates for the zombie companies are going even higher, which will bring more zombie companies down. This will result in a vicious circle until the economy will be cleaned from the unproductive zombie companies.

Defaulting zombi companies will be the secondary effect of the current crash.

In parallel, unemployment will grow and the salaries will decline. This results in reduced demand. As next, the revenues of the producers will decline. This will reduce the profits of the producers, which will reduce their stock price.

This implies the stock markets will continue the fall. It’s because the secondary effects of failing zombies will take over the primary effect of supply chain shock and declining revenues.

Even bigger stimulus packages

The central banks and governments may understand these secondary effects and will respond with even bigger stimulus packages. Maybe they can stop the decline, but this will be on huge costs of the additional base-money created and on the cost of additional state deficits, which translate into the increasing interest rates, which will then again cause the zombies to fail.

The failing zombies will default on their loans and banks have to write off these loans. If these write-offs are too big, then the banks will need to be recapitalized (either with base-money creation or with the new government debts). This will reduce the credit in the economy, which translates into the credit-crunch, which translates into additional zombie companies failing. The failure of the zombie companies will be a healthy outcome for the economy: However, this will include as well as failing banks, which will trigger massive base-money creation by the central banks.

How far will the stock market crash?

Let’s look at the chart above – it contains the Fibonacci retracement levels.

The current S&P 500 down movement continues can continue till the 0.618 retracement level, which would be ca 1’700 USD or it will continue till the 0.786 retracement level, which would be ca 1’250 USD.

The current S&P 500 level at the moment of writing is 2’300 USD. So, there will be quite some way to go.

Analysis of Coronavirus impact on the Bitcoin price

The unprecedented base-money creation by the central banks should logically speak lead to the increase of the Bitcoin price. So, the key question here is – why did the Bitcoin price dropped so massively?

The answer to this is in our overleveraged monetary systems. Quite an amount of hedge funds are using highly leveraged trades. It’s because the low-interest-rate environment creates a perfect environment for the over-leveraged trades. One needs to take a loan and to leverage his long trading position. Everything works well until the markets are moving up. As a result, overleveraged hedge funds receive nice profits. As all the market players know the “Fed Put” (i.e. Fed starts printing money as soon the markets will crash) then this was considered a low-risk trade.

However, the opposite happened – the “Fed Put” did not work, the market’s crashed and the overleveraged positions were below the water. When this happens, then cash needs to be added into the leveraged positions for avoiding the liquidation (and losing everything). To get cash everything will be sold – gold, treasuries, and Bitcoin. This was the reason for the Bitcoin price crash.

Something similar happened in the 2007/2008 Lehman crisis with the gold price – it was widely anticipated that the central banks will respond with a massive amount of new base-money, which would drive the gold price up. However, the gold price was sinking. The reason was the same as now – the hedge funds with overleveraged positions had to liquidate any assets (including safe-haven assets) for avoiding liquidation of their trading positions.

However, when the S&P 500 reached his bottom, and when it became clear how much new base-money was created, then the gold price had quite some increase.

Coronavirus and Bitcoin price – What’s next?

We have here multiple forces in play:

  • We forecasted before that the S&P 500 continues to move down to 1’700 level or 1’250 USD level. This would cause the next round of the “any asset liquidation” to get cash and to fill the holes in the trading positions. This would drag Bitcoin price down again
  • From the other side, it becomes clear about which un-precedented joint effort of base-money creation we are speaking about. This will result in the additional demand for Bitcoin, which will drive the Bitcoin price up
  • The initial fiscal stimulus packages and base money creation packages will probably fail. It’s because of the secondary effect of failing zombi companies. This will result in bank failures (the zombie company’s defaults result in huge holes in the banks’ balance sheets). As next, the banks will be re-capitalized, of course, with the newly created base-money. As a result, the Bitcoin price increase will increase even more

There are multiple scenarios for how this crisis will play through the economy. However, all paths will result in the:

  • Massive base-money creation (which pushes Bitcoin price up)
  • Massive fiscal stimulus, which creates more government debt, which brings the interest rates up, which will cause the banks to fail (which pushes Bitcoin price up)

The Bitcoin price decline, which is triggered by the S&P 500 downward movement will stop at some point – that’s when the S&P 500 will reach his bottom. After that, we have the effects of the already announced base-money creation, which will drive the Bitcoin price up.

After that, we will have the upcoming base-money creation, which will be triggered by bank failures.  This secondary effect of base-money creation will be more than the initial response base-money creation, which will drive the Bitcoin price more up.

The bank failures can result in the collapse of the traditional financial system and they will trigger the flight to crypto. Everyone can control his financial assets without the middlemen (without the existing banking system). This will add additional price pressure to the Bitcoin price.

Nowadays we have several discussions about what are the key use cases of crypto. Some speak about the payment use cases, we in the speak about the credit use case, and some speak about the gaming use cases. But in this scenario here the key use case will be the alternate financial system, independent from the current financial system, with the ability to control your assets.

If we look at this context here, then the Bitcoin crash of the last 10 days will be just a blip on the radar screen. However, this crash will be important, because it will enable the emergence of a well prepared alternate financial system. In this context, the Coronavirus impact on Bitcoin price is rather an enabler of the financial system.

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