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How will cryptocurrency fare in a recession?

Never forget the fact that crypto was born out of the 2008 meltdown. Bitcoin was earlier launched in 2009 as a response to the great financial crises and the global recession in 2006. This was designed as a decentralized payment system that didn’t depend upon banks. However, bitcoin hasn’t faced the wrath of a full-blown recession.

cryptocurrency fare in a recession

Defining a recession

A state of recession occurs when the GDP shrinks, while unemployment rises and retail sales fall. This situation is also marked by a decline in manufacturing output. Typically, a state of recession usually makes the investors look for a safe haven in gold or dollars.

While nobody wants to see one’s nation in a state of recession, they are actually a part of the natural economic growth cycle. This impending loom may come with challenges for crypto investors but may also offer a lot of opportunities too.

It doesn’t come off as a surprise that bitcoin is a highly speculative asset. More often than not, cryptocurrency also displays a positive correlation with stocks.

Let’s talk about history for a while. The Covid-19 recession that began in February 2020 did have a very positive impact on bitcoin. It shot bitcoin to an all-time high of $28,000. This in turn led the Wall Street firms to start taking the largest cryptocurrency by market capitalization seriously. However, this time’s recession may be a little different. Firstly, bitcoin’s extremely strong correlation to stocks depicts that the former’s performance will more likely depend upon what the broader markets do. Bitcoin’s correlation with NASDAQ shows that if the Fed continues to hike the rates, or if the market believes that it will hike the rates, Nasdaq is bound to suffer in the short term. If this correlation continues, as it has been continuing for a long, then bitcoin suffers too. However, one must know that not all coins will make the right call. While some of them could collapse, this may allow other coins to grow as they fill the vacuum.

Enumerated below are some reasons to consider regarding bitcoin’s thriving trajectory during a recession

  1. Bitcoin holds value in both economic expansions and contractions. Its very value is derived from its scarcity.

  2. Bitcoin is inherently diversified from the very offset. This is because it isn’t subjected to an economy’s loss or gain. The value of bitcoin is not vulnerable to environmental concerns, the government crackdown on mining, regulations, etc. It is a form of wealth without any boundaries. Since it is not tied to any economy’s success or failure, it represents itself as organically diverse.

  3. A contention that actually fares well is that bitcoin was also made for recession. Bitcoin was initially built on the pretext of giving money whicthatld be used by individuals without the intervention of third parties.

  4. Bitcoin could also serve as a storage of value. Since it is decentralized, its price could remain stable during a recession.

  5. Cryptocurrency is inflation proof, owing to the fact that their supply is usually fixed, unlike Fiat money. The total number of bitcoins is strictly limited to 21 million (BTC). Hence, cryptocurrency is immune to inflation since its value rises in proportion to an increment in demand and velocity.

  6. As a whole, cryptocurrency empowers the public in a multitude of methods. Anybody may or may not participate in the system. This is a lot better than the Fiat system of currency, where only the government and the banking organisations know how the money supply grows or shrinks.

What will happen to bitcoin during an extended recession?

When we talk about an extended recession, one can expect to see positive price movements with bitcoin. However, the situation for the rest of the crypto market will be in a haze, as the investors may find it hard to raise funds in a tighter lending market.

Digital assets create a lot of value through network growth and brand loyalty. Given these markings, it’s very much possible that digital assets might be the only kind of assets that a recession will not negatively impact.

As a final thought, there is no asset that is entirely recession-proof. However, amidst the inherent flaws of the monetary system, bitcoin has been given a new identity of a lifeboat in the wake of a global financial crisis. The cryptocurrency was built as a viable alternative to the Fiat currency system and was developed with qualities like empowerment, transparency, and inflation resistance. The properties of cryptocurrency are way better than any Fiat currency. Hence, it’s never too late to explore!


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