Following a statement on Friday from the Fed’s Chairman Jerome Powell hinting at lower interest rates because of the “evolving risks” coronavirus poses to the economy, Goldman Sachs analysts now expect a 50 basis point cut in the Fed’s March 18th meeting.

Central banks around the world may coordinate an easing of interest rates to fight the impact of the spread of coronavirus on the global economy. Uncertainty of the lasting effects is another key factor in depressing financial markets.

The OECD lowered its global growth projection for 2020 to 2.4% because of the outbreak — the lowest since 2009. However, if the virus continues to spread into Q3, growth prospects look even more bleak with a projection as low as 1.5%.

The hardest hit sectors will undoubtedly be the energy, travel, and tourism sectors. Disruptions to supply chains also pose an issue to global economic activity. On the other hand, online gaming and online education are expected to be the ‘winners’.

To combat falling demand, an interest rate cut makes credit cheaper benefitting borrowers and banks (while punishing savers). Lower interest rates are meant to help boost investment spending by companies, increase consumption through lower borrowing costs, and make exports more attractive through a lower real exchange rate.

Most advanced economies have not returned above the interest rates that were in place prior to the Global Financial Crisis in 2007–2008.

For years, many have argued that the policy of near-zero interest rates has just distorted markets, propped up inefficient companies, and that quantitative easing (QE) has just been ‘socialism for bankers’. The only effect of QE was to prop certain assets up, such as equities and have done nothing but to re-distribute wealth to the richest in society.

Immediate Impact of Coronavirus Spread on the Markets

Coronavirus impacted the financial markets as soon as it was clear that the outbreak had started to gain momentum outside of China.

The latest stock market rout (illustrated below) is comparable to that of the Dot-com bubble bursting in 2000, with an approximate ten percent drop week-on-week for the S&P 500 (shown in red).

The large drop has prompted President Trump to call on the Fed to lower interest rates and take the lead. Goldman Sachs analysts are expecting a 1% decline in interest rates over 2020.

However, on Monday, stocks have rebounded slightly, but there is a risk that if the sell-off continues. But if this is just a scare, then we’ll see a recovery and a continued climb.

Gold (shown in yellow), traditionally a safe haven, also faltered. Bitcoin (shown in orange) and the wider cryptocurrency market reacted negatively as well, with prices turning south.

Even some crypto-conferences are being cancelled. Interestingly, this could open up a new wave of much more cost-efficient conferences using Virtual Reality (VR), as demonstrated by this presentation about PayJoin (a privacy-preserving method for transacting in bitcoin):

What’s Ahead of Us in March?

There are a host of central bank events coming up in March.

BTC-USD typically dances to its own tune, and these monetary policy decisions/statements do not usually have a significant impact on price action. However, a coordinated approach amongst central banks may have the potential to evoke a reaction from bitcoin.

So far, the Reserve Bank of Australia cut rates to a record low of 0.5% on Tuesday in an attempt to mitigate the effect of coronavirus on economic activity. The Fed implemented an emergency rate cut on Tuesday as well, and the Bank of Canada is due to decide on rates on Wednesday (15:00 GMT).

The most important decisions will come from the European Central Bank, the Fed, the Bank of Japan, and the People’s Bank of China. Investors will also be looking at the accompanying statements to assess the impact on markets:

European Central Bank rate decision: Thursday March 12th (12:45 GMT),

US Federal Reserve rate decision: Wednesday March 18th (19:00 GMT),

Bank of Japan rate decision: Thursday March 19th (03:00 GMT),

Swiss National Bank rate decision: Thursday March 19th (07:30 GMT),

People’s Bank of China rate decision: Friday March 20th (01:30 GMT), and

the Bank of England rate decision: Thursday March 26th (12:00 GMT).

While the monetary policy of central banks is discretionary, Bitcoin’s monetary policy is pre-programmed, rules-based, and set in stone.

The block reward halving in early May 2020 will reinforce Bitcoin’s scarcity and reduce some selling pressure, as the number of new coins mined daily is cut in half roughly every four years.

A coordinated easing policy by the major central banks of the world will further widen the divergence between the supply/interest rates of important fiat currencies and the supply/interest rate of the Bitcoin ecosystem (especially before the block reward halving in May 2020, setting up a perfect storm for bitcoin in the second quarter).

The timing of a potential ‘coronavirus financial market punch bowl’ is another factor that could play into the hands of bitcoin bulls.

Historically, April has been overwhelmingly positive for bitcoin investors — as shown by the violin chart below.

Monthly Bitcoin Returns between August 2010 and January 2020

Read a violin chart is a bit like reading a density plot. The diamond represents the mean return for a particular month. Source: Interdax Blog

The monthly return in April was negative for just two of the years that bitcoin has been around (in 2014 and 2015, with losses between 4%-6.5%). The mean return during April over the past nine years has been just above 50%.

Expect a lively April for BTC-USD if we see more easing measures introduced by other central banks in the coming weeks, with two positive fundamentals likely to drive bitcoin higher over the long term.

First, the reduction in both the daily emission and the resulting selling pressure from miners as a result of the block reward halving. Second, a widening divergence in the interest rate/money supply of bitcoin and the greenback/other fiat currencies.

Disclaimer: This blog post is for informational purposes only and should not be taken as financial advice.