Blockchain is such a new technology that it hasn’t lived through any major recession yet, making COVID-19 the first international crisis it has had to contend with. So far, the pandemic has caused significant disruption in Bitcoin mining and the already volatile cryptocurrency prices. Many wonder if blockchain is in trouble.
Blockchain Originates in Disruption
Blockchain first made the transition from theory to reality in reaction to the financial crisis of 2008. Bitcoin, the first large-scale practical application of blockchain technology, was launched in 2009 specifically to challenge the flaws of centralized financial institutes like banks. Its paradigm-changing concept provides a decentralized currency, and technology designed to ensure the availability and reliability of data.
Blockchain as a Technology
Blockchain is a technology that works as a framework for many possible applications. Bitcoin is just one of them. Data, such as information about a transaction, is packed into a virtual box or block. It is then labeled with a hash. This hash is determined by the data content and the hash of the block before it in the chain and so on. This is called the Genesis Block. Changing information in one block would not only change its hash, but also require changing the hash of every other block in the chain. This makes blockchain a safe and theoretically hacker-proof way of storing information, as hashes are calculated and stored not on a centralized server, but with every unit in a huge decentralized network. Even if a hacker succeeded in overwriting chain information on one computer, the rest of the network would immediately notice and correct for the unauthorized change. This immutability of data makes it very attractive for a wide range of applications, from transparent logistics and smart contracts, to financial services, secure storage of medical files, and even games. These applications look more tempting than ever as uncertainty, disinformation, and disruption of supply chains shake up markets.
Bitcoin’s Reputation at Stake
Since its inception, Bitcoin has been notoriously volatile, as can be expected from an innovative concept just beginning to penetrate the market. However, much was predicted of its potential as a safe haven investment. Theoretically, cryptocurrency prices should not be linked to stock market movement, as they are not controlled by any centralized entity and therefore cannot be manipulated in the way fiat currencies can. Cryptocurrency was marketed as the virtual equivalent to gold, a hedge to traditional financial assets. However, during the COVID-19 pandemic, cryptocurrency prices crashed just as stock markets did. Cryptocurrencies are a financial asset that can also be struck by market panic and recession. Despite this, their decentralized nature might make them more attractive to investors during a time when many nations are approving stimulus packages.
Bitcoin blockchain existence and safety are assured by so-called miners, voluntary members of the network making their computing power available for adding new blocks to the chain. Their incentive: a monetary reward – currently 12.5 Bitcoin per block. As COVID-19 was bringing China to a standstill, the first headlines appeared claiming Bitcoin mining was in trouble. 60% of mining pools are located in China. Since they are rewarded in cryptocurrency, as those cryptocurrency values started to fall, so was the incentive to mine. This effectively made some mining operations no longer profitable. Additionally, lockdown regulations interfered with operation upkeep. Smaller miners started shutting down. The bitcoin hash rate dropped significantly. Fortunately, blockchain technology has an inbuilt mechanism to reduce mining difficulty when mining power is decreasing in order to keep mining efficiency stable. In spite of the disruptions in mining, it has therefore been able to ensure overall network safety, even in the face of a pandemic.
COVID-19 and Halving
To make things even more unpredictable, every 210.000 blocks, on average every 4 years, the mining reward is slashed by 50% to ensure a controlled influx of new currency into the system. Decreased incentives can price some miners out of the market. These incentives can also increase competition between currencies as miners jump from cryptos that have already undergone halving to those that have yet to do so. At the same time, as miners have less cryptocurrency to sell but demand stays the same, this should drive up prices. The last two halvings in 2012 and 2016 caused markets to rally. This year, with markets still reeling in confusion, it remains to be seen if the 2020 halving can repeat the feat while keeping its mining base stable.
Blockchain itself is a disruptor. The recent pandemic crisis is testing it, and has already uncovered more than one weakness. This is especially true regarding the role cryptocurrencies aspire to in the financial marketplace. Blockchain, markets, and COVID-19 form such an intricate problem that at this point it is almost impossible to analyze fully how each is influencing the other. And yet, the current crisis also offers blockchain an opportunity to prove itself as a transformational technology that has unprecedented potential to safeguard access to reliable data in times of complex markets and needs. In the bigger picture, COVID-19 may have opened more doors for blockchain than it has closed.