Stock market, crashing. Bitcoin and other cryptocurrencies, crashing. Gold, crashing. Superannuation balances, crashing.
Why? Coronavirus. That’s why.
I think we all know this by now. And so the question really is this: Why is the coronavirus causing this havoc?
First up, I’ll briefly explain what the coronavirus actually is. (If you know what the coronavirus is already, feel free to scroll down.)
What is the coronavirus?
The coronavirus is a type of virus. Coronaviruses have been known for a long time. Then what’s with all the panic? This coronavirus you’re hearing so much about is a new strain of coronavirus.
Until December, this strain of coronavirus had never been found in humans. That’s why there is no treatment for it yet. This new coronavirus causes a disease called COVID-19. Some COVID-19 sufferers have recovered easily. Others have gotten very sick very quickly.
In January, I drew on my experience as a pharmacist to shoot an explainer video on coronaviruses and the COVID-19 disease outbreak. This was uploaded to the Nugget’s News YouTube channel. Watch it below if you like.
Coronavirus creating chaos
As you’d know, the coronavirus is all over the news. Every country, every day. COVID-19 is having an effect on virtually all areas of society. One of these is the financial and cryptocurrency markets.
Why has the coronavirus outbreak wiped trillions off global markets? It’s all got to do with investor uncertainty. Realistically, there’s still a lot we don’t know about COVID-19. And because there’s no proven therapy or vaccine, the coronavirus keeps spreading.
Governments continue to introduce coronavirus counter-measures. However, these come with massive economic consequences. Suspending travel. Shutting businesses. Limiting crowd sizes. Mandating self-isolation.
This is extremely disruptive. From a supply standpoint: Company supply chains have collapsed. Lower production capacities mean lower sales. From a demand standpoint: Our spending has dried up completely. Consumer spending on travel, tourism and entertainment—which includes sporting and cultural events—has evaporated. It’ll stay like this for weeks, even months, I suspect.
I explore the economic effects of the coronavirus outbreak in the below interview with Real Vision founder and chief executive Raoul Pal. (This has been one of the most popular Nugget’s News videos and podcasts to date. Thanks for all the feedback!)
Was this the crash we had to have?
I firmly believe the onset of the coronavirus outbreak has sped up the inevitable. Indeed, when stock market bull runs enter their 11th year, the law of averages would suggest an end is near.
That’s also true with respect to economic cycles. Especially in Australia, which hasn’t had a recession in nearly three decades. With debt at record levels, the job of propping up the economy by printing more money gets trickier and trickier.
Economies move in cycles. Growth and expansion can only go on for so long. I explain all of this in the below video, which is about why I believed we were in a global asset bubble.
When global markets crash, we all suffer
Even if you don’t individually own stocks or cryptocurrencies like bitcoin, these intense sell-offs are hurting you financially. That’s because you almost certainly own shares through your superannuation or self-managed super fund (SMSF).
For those invested in cryptocurrencies, you’d know that this asset class has declined heavily in recent times. These cryptocurrency price declines have happened alongside the global stock market crash.
Because stock markets are in meltdown, there’s a good chance the main reason behind the cryptocurrency sell-off is a desperate scramble for cash; a rush for liquidity. That’s because it’s likely that many cryptocurrency market makers also make markets in traditional equities and bonds.
Price performance from Feb. 13 through Apr. 2
What options do you have?
There’s so much uncertainty over how much further the prices of stocks and cryptocurrencies will fall. I keep getting asked about what to do next. Obviously, there is no best solution. Everyone’s circumstances are different. However, there are a number of ways that investors are navigating these testing markets.
- Portfolio de-risking. Investors are selling their more speculative stocks into ones that are more defensive like major banks. Others are swapping stocks for bonds, which is why bond yields are at record lows. In crypto, the equivalent of this is selling altcoins into bitcoin or stablecoins. (Learn about stablecoins in What Are Stablecoins?)
- Cashing out. As mentioned, many are selling their stock and cryptocurrency holdings for cash. These investors are doing this because they believe the global stock and cryptocurrency market crashes still have a ways to go. (Many investors are even ditching their local currency for U.S. dollars.)
- Sitting tight. When markets are cratering, a lot of investors feel they need to do something to stem the bleeding. However, they often give no thought to the possibility of doing nothing. Especially for investors who are in it for the long haul, doing nothing (i.e., HODLing) can turn out to be the smartest option.
In the below video, myself and Dan from The Chart Guys talk more about how money rotates through different asset classes when panicked investors are looking for safety.
Where’s this leave bitcoin?
It is very possible that the coronavirus outbreak and the plummeting global market will cause an economic recession. To try and stop this from happening, central banks will slash interest rates. Many countries will see negative interest rates.
We’ll also see central banks print money—and lots of it. Doing this devalues the local fiat currency, making the money you and I have worked hard for less valuable. (Fiat currency is money that has no intrinsic value and is declared legal tender by a government.)
Managing fiat monetary systems is difficult. Many countries now are navigating uncharted waters. No rulebook to guide them. Investing in bitcoin gives you a hedge against the mismanagement of fiat monetary systems. Whose side are you on?
I’ve had my super in cash & bonds for over a year now. It’s been hard watching stocks go parabolic over that time. But this month the ASX gave back 4 years of gains. I’ve rotated some funds into #Bitcoin & plan on buying bargains across all asset classes in coming months. ???????????? pic.twitter.com/DjOnirKMlY
— Alex Saunders ???????????????? (@AlexSaundersAU) March 13, 2020
There’s no doubt that the coronavirus pandemic is having crushing effects on various aspects of the economy. Because of this, valuations are plunging across a number of asset classes such as stocks, bonds, cryptocurrencies, real estate, and precious metals.
In chaotic times like these, being a part of the Nugget’s Crypto Community really counts. Every day, I’m updating members on how I’m approaching things from an investment standpoint. When extremely important news breaks, I’ve also been getting behind the camera to explain my thinking. We’re also actively discussing a range of other suitable investing strategies.
Market-moving information is coming out just about every hour. For that reason, we have a daily thread where members have been posting breaking coronavirus news. This lets us all digest it and talk about how and why cryptocurrency and stock markets are reacting. Learn more about the Nugget’s Crypto Community.
Member live Q&A video on coronavirus’ impact on markets