Is Coronavirus the catalyst for a widespread market shakeout?

With coronavirus currently causing widespread crashes in the market, this article will examine if the pandemic has the potential to shakeout fearful investors before the market begins to climb again

Bitcoin slid under its support levels of $7,700 last night, leading some analysts to anticipate a further fall to the next level of support at $6,600, levels last seen in December last year, as seen in this tweet by market analyst Crypto Michaël.

This is arguably Bitcoin’s first major test since its introduction. Until now, Bitcoin and the rest of the crypto market have seen relatively stable market conditions.

Factors such as Trump’s trade war with China and the financial deregulation of banks introduced by the US President, are now arguably hammering global trade and consequently haemorrhaging the crypto market.

With the coronavirus now testing global markets in the most significant way since the banking crisis in 2008, it is to be expected that Bitcoin’s price still has room to fall.

Market shakeout theory is tied to macro market cycles. In times of price decline, investors will sell their assets off out of fear that prices will continue to depreciate. 

After the majority of holders have been mopped up, institutional investors then buy in bulk at cheap prices. This in turn gives the market a shot in the arm, fear decreases, and the rest of the market gradually buys in before bullish price action is eventually seen. At which point, whales sell off at the market’s peak and the cycle repeats and continues.

There is some evidence to suggest that the coronavirus has been latched onto by whales in the market, who have begun a sell-off in anticipation for the market’s recovery in the coming months. 

Jeff Bezos, the CEO and majority shareholder of Amazon, recently sold off $4.1 billion worth of Amazon stock. It is noteworthy that this sale happened earlier in the year before the recent decline in global markets, meaning that Bezos was able to sell before the market declined sharply and rumours of Amazon stock being overvalued in the face of coronavirus began to surface.

Bezos could potentially follow the market cycle, wait for Amazon’s stock to fall, and then use his $4 billion dollars to rebuy his sold off stock at cheaper prices.

Cryptocurrencies are seemingly more interconnected to traditional markets than perhaps previously thought. With Bitcoin’s halving approaching in May, and the coronavirus not showing any signs of slowing down, it is possible that crypto whales are dumping Bitcoin’s price amid the current fearful market conditions.

After which, they can wait for the pandemic to die down and start to slowly accumulate bitcoin at low prices, all in anticipation of the price increases usually seen in the aftermath of Bitcoin halvings.

In fact, there is evidence that some investors are currently buying stocks at cheaper prices, although it is yet to be seen if the bottom is in yet as the virus continues to make its impact. Investors also bought at rock bottom prices in the aftermath of the 2008 financial crisis, including Warren Buffet who reportedly made $10 billion.

Shakeouts are an expected part of market cycles, and savvy investors will be able to ride the waves made by whales stand to make good returns.  As the famous adage by Warren Buffet says, “Be fearful when others are greedy and greedy when others are fearful.