Will bitcoin (BTC) turn out to be recession proof?
03:06, 14 April 2022
As fears of recession intensified over the last month, the bitcoin market (BTC) and digital assets in general saw an unexpected resurrection, which caught many by surprise. Do some investors subscribe to the narrative of bitcoin’s properties as a safe haven? Will BTC prove to be recession-proof once tested?
The oldest cryptocurrency was created a year after the 2008 recession and has yet to be tested by a subsequent worldwide economic contraction, but this may be about to change.
Bitcoin to US dollar (BTC/USD)
In the middle of March, experts started to warn of recession in Europe and the US due to geopolitical concerns and supply chain issues.
What is your sentiment on BTC/USD?
How will BTC fare in recession?
BTC was designed by an, so far, unidentified person – or a group of people – Satoshi Nakamoto and its decentralised nature was supposed to fix the ills of the centralised financial system which led to the 2008 recession.
If the bears are right and the global economy is headed for a contraction will BTC indeed prove to be recession proof?
The initial response was negative for the coin. When recession fears first appeared in the middle of March, they struck an already depressed cryptocurrency market.
The crypto market’s capitalisation has shrunk by roughly a trillion USD since its November 2021 zenith. BTC was trading 40% below its all-time high.
Sentiment in the market had been gripped by fear for months, and BTC hit ‘a death cross’, a technical indicator that confirms that the short-term downturn trend is now long term.
BTC confirmed a long-term downtrend in February – Credit: KoyfinThe bitcoin market is known for its volatility and the chart above shows it has seen major price swings over the last 18 months, and has been moving in tight correlation with risky assets, not living up to its reputation as digital gold and instead acting more like a digital growth stock and plunging during stressed markets.
Bitcoin a ‘risk-on’ asset
“Bitcoin is inherently a very risk-on asset, experiencing extremely high volatility which would fare poorly in a recession,” analyst James Webb from CryptoCompare market data research says.
Not only has BTC had a tendency to perform risky assets such as equities but this has been even more pronounced during times of market turmoil.
But Webb says that in recession a sharp decline would be seen across asset classes: However, he points out that correlations between different asset types tend to converge during recessions, a phenomenon which occurred during the 2008 recession.
“In the short term, it would make sense that bitcoin would fall alongside most asset classes,” he says.
Similarly, Daniel Yurcho, a blockchain entrepreneur and NFT Marketplace chief executive, believes BTC would be initially hit with a sharp decline.
“At first, BTC and other cryptocurrencies like ETH and ADA will move in tandem with the traditional financial markets like the stock market,” he says.
Long-term BTC outlook ‘more positive’
However, he says the longer term outlook is more positive. Yurcho predicts that in a global recession investors will instead become more open minded towards digital assets such as bitcoin.
“Traditionally in recession periods it’s better to own outside commodities such as gold or real estate rather than save currencies that consistently lose spending power due to inflation.
BTC has not been in major recession yet – Photo: Shutterstock“BTC has yet to be present during a major recession, but investors have every avenue to purchase and hold cryptocurrencies as an exploratory option rather than saving dollars,” he says.
While the consensus seems to be on the bitcoin market’s initial reaction to recession, Webb says that its subsequent performance would depend on the reason for the economic turmoil.
Central bank actions are critical for BTC
“BTC’s longer term performance will be governed more so by idiosyncratic factors such as regulation and national adoption – whether that be bitcoin or central bank digital currencies,” says Webb.
Webb predicts that the post-recession outlook for bitcoin is positive as a global financial downturn would in itself make the case for digital assets.
“Coming out of a recession, bitcoin would most likely see positive sentiment as crises like these will exacerbate poor monetary policy and the distrust of centralised institutions/governments,” Webb predicts.
And Yurcho agrees: “Given that bitcoin was created in response to the shortcomings revealed in the financial crisis, I believe the mechanisms are in place for BTC to gradually be seen as a safe haven asset when our traditional financial mechanisms fail time after time,” he says.
Markets in this article
Related topics
