The Correlations of Cryptocurrencies and Global Recession

There’s no telltale signs to predict the cryptocurrency market during a global recession, but Bitcoin may emerge victorious in uncertain times.

The term “Recession” may bring about fear and uncertainties among people worldwide, resonating the effects beyond politics and the global economy. The last global recession, known as the ‘Great Recession’, happened between the late 2000s to early 2010s when it caused a period of reduced economic activity for some of the world’s most developed economies. While global recessions are akin to tidal waves, where the usual 10-year cycle pattern occurs within the natural economy of the modern world. Therefore, instead of having an utopian-like economy that is in an eternal expansion or boom, the global market is bound to correct itself inevitably. Fuelled by the ongoing global COVID-19’s pandemic in which numerous indicators point to a global financial failure, and governments failing to stop the spread, the next major global recession is nigh with the poorest and most vulnerable countries to be hit the hardest, as claimed by the World Bank.

The concept of cryptocurrency was popularised by Bitcoin, a decentralised digital asset that was invented in response to the financial uncertainty caused by the 2008’s global financial crisis. The cryptocurrency will be tested this year for the first time to fare against the pending recession. Until today, bitcoin markets had never lived through a significant crash or recession in the wider economy. That has changed since the world has been hit heavily by the coronavirus that originated in Wuhan city, China back in November 2019, and the market is monitoring the price movement of Bitcoin to see if it could serve as a ‘safe-haven’ asset for investors during a global recession. While it remains to be seen for Bitcoin, there are two obvious possibilities amidst the ongoing crisis: Either Bitcoin thrives or it takes a huge toll at the end of the recession.

The Coronavirus Recession

At the time of this writing, the cumulative number of infected cases globally is more than 1.2 million, with the heaviest-hit nation being the United States. The coronavirus (COVID-19) pandemic shook economies and markets to the core all around the globe. Business confidence is low. Along with unanticipated lay-offs and factory closures, the situation might just be the perfect storm that would wreak havoc on the U.S. economy and the US dollar. To cushion the effect of the inevitable crisis, the U.S. government has introduced several initiatives, including the controversial multi-trillion dollar Stimulus Bill, which aims at softening the economic impact of the novel coronavirus. This historic economic relief package has significantly boosted Bitcoin and cryptocurrencies, as well as traditional markets, with almost all assets climbing on the week of the announcement, in anticipation of the deal. The bitcoin and cryptocurrency community reacted with a combination of astonishment and celebration at the bazooka being leveled at the U.S. economy.

“The Fed’s $6 trillion stimulus plan would be enough to buy the entire market cap of Bitcoin more than 48 times,” Anthony Pompliano, a well-known bitcoin bull and partner at bitcoin and crypto-focused hedge fund Morgan Creek Digital, said in his tweet.

The massive U.S. stimulus plan, not to mention other packages being prepared by governments and central banks around the world, will easily surpass the response to the 2008 financial crisis in terms of timing, intensity and monetary value—but still might not be able to support markets and the economy.

How Bitcoin will be affected by a recession

As mentioned in the earlier paragraph, there are two equal possibilities to be discussed here. Either Bitcoin (BTC) thrives as the new gold standard during a recession or the USD emerges as the global currency and Bitcoin takes a massive hit. It is also worth noting that underperforming fiat markets could also accelerate Bitcoin adoption worldwide.

Currently, there is a pertinent case study to explore the possible effects of the Bitcoin trend during a recession: In countries where high inflation rates are prevalent, such as Venezuela and Zimbabwe, BTC is trading at a premium of 40% above market value, making fiat investments less valuable and less stable for investors. While Bitcoin is influenced by global markets to a certain extent, it has been dubbed the “digital gold standard” in terms of a more secure and stable form of investment. Bitcoin is also recognised globally, and is not controlled by a central authority. In this case, Bitcoin is well-received as the preferred investment option, unless the recession causes USD to re-emerge as a global currency instead.

Another point to note is that during a global recession, most companies will be forced to cut spending and to focus on survival, which could adversely affect employees with the risk of pay cut and retrenchment.  Thus, fewer people will be enticed to convert their fiat currency to cryptocurrency purchases. As a result, offloading of BTC in exchange for fiat currency is likely to weaken the BTC price and demand.

How Bitcoin could emerge in this chaos

Despite the uncertainties,  Bitcoin could potentially provide a solution for the people during the chaotic situation set off by the recession. It could double as a highly liquid and secure ‘safe-haven’ asset and as a payment platform in the midst of the turmoil. The former could provide Bitcoin’s status as a store of value that is not affected by regulatory policies and central banks’ debt, offering global fiscal stability during a recession. Meanwhile, the latter could allow Bitcoin to be used for transactional purposes by any entity, ensuring global liquidity and reversing the deglobalisation trend.

In the world of modern economics, recessions are evolutionary bottlenecks – where weak projects fail, strong projects succeed, and companies are more robust. Recessions weed out companies that rely primarily on investor speculation and consumer interest to succeed; they certainly can not withstand the headwinds. Notwithstanding the smaller remaining pool of companies, it will also be less crowded and lined with more concrete ventures. If people still find a product worthwhile during the uncertainty period, it is definitely reflective of its long-term value. The digital asset industry is overdue for a defining moment when consumers start considering projects for their specific value propositions, and not just their presence in the blockchain and crypto space.

What goes up must come down

After the bull market in late 2017, where Bitcoin reached an all-time-high of $19,891 per BTC, cryptocurrency investors have grown to acknowledge that gains not linked to real-world adoption of a product would not be sustainable.  Even though blockchain is a promising technology that could disrupt various industries, it has failed to grow a substantial user base beyond enthusiastic techies within the blockchain and crypto space as of 2020. A new market crash due to the pending recession may hurt everyone in the space, including both risk-tolerant and inexperienced retail investors. For example, amateur investors were badly affected by the market dump that occurred a year after the 2017’s bull market. Many of those had financed their purchases with money they could not afford to lose as there is fake optimism against a bleak backdrop of grinding stagnation by bundling an asset people can purchase with pipe dreams about transforming the economy, or freeing users from economic woes or changing the economy for the better.

The impact remains unclear

The pandemic-induced global recession is the first time the cryptocurrency market is experiencing, therefore it could be hard to speculate how things would go from here. Considerable factors such as the government’s initiatives (like the stimulus bill), social amelioration packages and the duration of the global pandemic may determine how the economy will be impacted in the coming months. The third Bitcoin’s halving event is also around the corner, adding to the unpredictability that could affect how people place their investment in BTC and other cryptocurrencies.

Although Bitcoin was invented to tackle the prevalent issues which exist in the traditional fiat system, the new asset class is still in the early phases of adoption. Thus, it remains highly uncertain as to how the process will unfold during a global recession as Bitcoin still has a long journey ahead of it. Coupled with its potential application as both a ‘safe-haven’ asset and payment platform, Bitcoin may be the last hope for governments seeking to stave off recession.

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