2020: A Year Of Two Halves For Crypto

Thong Ming Sen

September 29, 2020

At the start of 2020, only a clairvoyant prophet could have envisaged the calamitous chaos which would befall the world in the final year of the second decade of the twenty-first century.

As if foretelling the things to come in 2020, the chain of events started on the very last day of last year i.e. 31 December 2019 when the outbreak of the novel coronavirus was reported by Chinese health authorities to the World Health Organization (WHO).

This triggered a chain of events eventually culminating in the declaration of a global pandemic by the WHO on 11 March 2020 which brought the world’s economy to its knees as lockdowns paralyzed commercial activities resulting in massive job losses and close downs.

As we are reaching the last quarter of 2020, perhaps it is apt to pause a while and take stock of how the blockchain and crypto domains are doing over the past nine months during which humanity have borne witness to unprecedented events which would certainly go down in the history books.

The Rise and Fall of Crypto in 2020

For the crypto domain, the first part of 2020 was akin to a tale of two halves. Things got off to a roaring start in 2020 with the total market capitalization of the cryptocurrencies hitting the US$235 billion mark sometime in the middle of January gaining an impressive US$28 billion in the seven days period from 7 to 14 January 2020.

The rise in the crypto market capitalization was unsurprisingly led by Bitcoin (BTC) which breached the five digits threshold of US$10,000 prompting some to label the legendary cryptocurrency as digital gold.

In the context of crypto derivatives, the market witnessed a major spike in trading activities in January with the trading volume futures and options based on BTC and Ethereum (ETH) rising by 9% and 16% respectively.

This development was spurred on no doubt by the news that the United States (U.S)’s Commodities and Futures Trading Commission (CFTC) was looking to introduce regulations for the crypto derivatives market whereby this piece of news by itself would have given the industry a huge shot in the arm as it suggested the prospective legitimization of such derivatives thereby boosting investor confidence in the market. Suffice to say, things were looking rosy for the crypto market back in January.

Two months later however things looked very different when the global economy started to feel the bite of public lockdowns with the three largest hit industry segments being airlines, hotels and restaurants.

As the economic indicators began taking a deep dive, the crypto market similarly went down the drain suffering a major crash on 13 March 2020 in which the price of BTC fell to a worrying US$3,500.

Given the intricate connection between the crypto market and the global economy, it is likely that the market will start picking up once the economy starts proceeding on its road to recovery though only time will tell whether this is indeed so.

Nonetheless for crypto market players they can take comfort in the fact that at the very least the rise and fall of the market in tandem with the global economy illustrates the extent to which cryptocurrencies have grown into being a part of the mainstream economy.

Learning the Hard Way for MakerDAO

In times of crisis, the fault lines of a system are rendered bare for all to see and this certainly held true for MakerDAO which prior to the economic onslaught of the Covid-19 pandemic was considered the beacon which lights the way for the decentralized finance (DeFi) network.

During the March 13 crypto crash, the price of ETH fell by almost 50% to a low of US$95 resulting in debt positions which used ETH as collaterals being significantly under-collateralized whereby this triggered a wave of liquidations which overloaded the system of MakerDAO’s DAI stablecoin.

As the crypto market increasingly becomes part of the mainstream economy, the degree of exposure to economic turmoil would become correspondingly greater as well.

Accordingly, MakerDAO would do well to learn from its experience during the March 13 crypto crash  particularly of the fact that the crypto market is not immune from the macro economic landscape which it is increasingly becoming an inextricable part of.

A critical element  that was missing from MakerDAO’s operating framework was that of crisis governance which would have prepared it for black swan events such as the economic downturn resulting from the Covid-19 pandemic.

The good news for DAI investors is that MakerDAO is actively making the necessary changes to its platform to accommodate the changes brought on by the current economic climate whereby although this is somewhat ex-post facto i.e. after the event, it is always better to be late than never.

Crypto Market to Bounce Back Stronger

Prior to 2020 the crypto market has had its fair shares of ups and downs which brought with it its highs and lows but the market never failed to bounce back up again. As with humanity in general, the crypto market would emerge stronger from the trials and tribulations brought about by the Covid-19 pandemic before forging ahead into an unknown but promising future.

Sources: Medscape, Bitcoin.com, Nasdaq, TheBlockCrypto, Coindesk, Forbes, CoinTelegraph

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About the author
Thong Ming Sen

Content Strategist

Combining his professional experience as a corporate legal practitioner with his knowledge of blockchain, Ming Sen finds it fascinating to explore the endless possibilities of blockchain particularly in the regulatory domains of the financial services and capital markets sectors.

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