The COVID-19 pandemic currently sweeping the world has caused some of the worst panic the world has seen in decades. Empty supermarket shelves and alarming statistics from overburdened hospitals are making us all worried.
The pandemic is affecting the financial world as well. The pandemic panic has affected not only the bitcoin to dollar exchange rate but also stocks and many other markets.
The main drivers of panic selling
The most obvious driver of panic selling is, obviously, panic. But, it goes a little deeper than that. There are two main things that tend to kick it off. Forced selling, and a lack of liquidity.
Forced selling is where sellers simply have to sell an asset, no matter the price. There are a number of reasons this might happen. Maybe a business has failed, or an investor has a stop-loss order on the market. Either way, the seller has to get rid of the asset, no matter the price. A lack of liquidity happens when an asset can’t be sold without dropping the price down as you’re selling.
The psychology of panic selling
Once the selling starts, other traders and investors take notice. They might see that others may be forced to sell soon too, or that a lack of liquidity will likely push prices down even further. This causes them to consider selling their own share of the asset before prices drop. A plummeting price becomes somewhat of a self-fulfilling prophecy.
Panic selling becomes a contagion. One person catches it and passes it on to two new people, who then pass it on further. Before you know it, panic selling has infected the whole market, with nobody wanting to buy the asset in fear that it might drop even further.
How this relates to COVID-19
The COVID-19 pandemic is unprecedented in many ways. Whole sections of the global economy have simply stopped operating. In many cases, this happened overnight. Most businesses around the world simply aren’t set up to deal with this kind of shock. Even the most robust economies and businesses in the world have been taken completely by surprise. The sudden economic halt has created huge financial problems for many businesses. Much-needed revenue for many has simply disappeared.
Bitcoin as a safe haven asset
A lot of people in Bitcoin believed that prices would shoot up during an economic crisis, but this is not what’s happened. In fact, the crisis has directly led to the ‘forced selling’ that typically sparks panic buying. Many people have debts and obligations that need to be paid or they’ll go bankrupt, so they have to sell their assets to cover the costs. There’s also a liquidity problem as there aren’t as many investors willing to buy up the stocks and other assets.
The combination of these factors has led to the fastest 30% stock market drop in history. The sudden global economic shutdown has left many people around the world to sell, no matter the price. And that price is dropping lower and lower every week. Other markets have dropped significantly too, including the cryptocurrency market.
As a matter of fact, we can say that the expectations about Bitcoin being a safe haven asset hasn’t come true. At the moment of crisis, investors started selling it instead of buying. Bitcoin is still embraced like an investment, not a currency. Therefore, when people face real economic problems, they do not seem to be willing to exchange all their money for Bitcoin. Instead, they try to turn all their Bitcoin into paper money, as they do not perceive cryptocurrency as something that can be used to pay for basic needs yet.
When will the panic selling end?
There’s no doubt that panic selling has taken the markets by storm, but when will it end? Unfortunately, it’s not that clear. We truly are in untested economic waters right now. History has never seen so many economic changes happened so quickly at the same time around the world. Even the Global Financial Crisis seems tame in comparison to what’s happening in 2020.
Much of it will have to do with the response of governments around the world. Firstly to get the health pandemic under control as quickly as possible, and secondly the monetary policy to tie businesses over until the economy can start up again.
If governments can’t find ways to cover the balance sheets of banks and companies in this time of crisis, they’ll be forced to sell even more of their assets. If the pandemic crisis deepens or goes on too long, then more individuals and businesses will be forced to sell their assets, too. This is why panic selling is so deeply tied to economic stimulus announcements from state leaders and central banks.
On the other hand, if the world can come together to find an effective solution to the COVID-19 health crisis, get the economy running again soon, and support businesses, the panic selling could well end soon.
An opportunity for traders
Panic selling is a very bad thing for many people. Especially those that are forced to sell their assets, be it stocks, bonds, gold, or cryptocurrency. It also creates victims out of scared investors that sell their assets just because of the panic. But, for more cool and level-headed investors of the world, panic selling can actually be an opportunity to make a profit.
Panic selling is primarily caused by forced selling of assets, no matter the price, followed by other investors that jump on the bandwagon. That means that the price often quickly drops well below what the asset is really worth in the long term. But, it keeps dropping in price because there simply aren’t enough buyers.
If you can keep your emotions in check, there’s an opportunity to buy severely underpriced assets and make a healthy profit in the long term. There’s no need to feel bad about it either, you’ll be providing much-needed liquidity in the market at a time when buyers are short.
The tricky part is picking the right time to buy. You don’t want to buy right before another round of panic selling. You need to wait until most of the buyers that were forced to buy, will be out of the market, and the emotional panic stage overs. Then, you can jump in and buy some cheap assets.
The panic is real
This may be the fastest onset of panic selling and panic buying the world has ever seen. The combination of a highly infectious, deadly virus and an intimately connected globe and economy has set the stage for market crashes unseen at any point in history. The important thing is to keep a cool head in all of this, even if there may be more to come.
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Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.