Crypto During a Recession: Here’s What You Can Expect

Bitcoin, the world’s largest cryptocurrency, was created in 2009 during the depths of the great financial crisis. It took a while to gain traction but, along with other cryptocurrencies, it has become a major market worth around $1 trillion.

But with the broad crypto market falling sharply from all-time highs hit in November 2021 as the Federal Reserve raises interest rates to combat high inflation, many investors are wondering how Bitcoin and other crypto assets would fare if the economy takes a hit. a recession

This is what cryptocurrency investors should expect, according to experts.

Crypto is not a safe haven

As investors weigh the possibilities of a recession or stagflation environment, many are looking for assets that will protect them from the potential storm. But experts say that cryptocurrencies are not the place to find them.

“I’m not sure cryptocurrencies can be considered a safe haven given their volatility,” says Scott Sheridan, CEO of online brokerage firm Tastyworks.

Popular cryptocurrencies such as Bitcoin and Ethereum have fallen nearly 70 percent from their all-time highs as investors shunned risky assets following rising interest rates.

Sheridan said he does not foresee a change in cryptocurrency prices until volatility, as measured by the VIX, returns to more normal levels.

“Until then, I think the combination of potential alpha in equity markets and the state of developments and subsequent turmoil in cryptocurrencies is geared more toward speculation than storm protection,” he said.

Therefore, it will be difficult to outperform both stock and crypto investors until recent volatility levels subside.

There is no way to value cryptocurrencies

One of the main criticisms of cryptocurrencies as an investment is that they have no intrinsic value, because they do not produce anything for their owners. Your return is entirely dependent on selling it to someone else for a higher price. Legendary investors, including Warren Buffett and Charlie Munger, have heavily criticized the investment merits of Bitcoin and other cryptocurrencies for this reason.

“Crypto is an investment in nothing,” Munger told the Australian Financial Review in an interview in July. “I don’t want to buy a piece of anything, even if someone tells me I can’t do more with it.”

Even those with a more positive view of Bitcoin and crypto assets acknowledge that valuing digital currencies is difficult, if not impossible.

“There is no set way to value Bitcoin,” says Noelle Acheson, head of market intelligence at crypto lender Genesis Global Trading. “It’s narrative-driven: narratives can turn on a dime.”

Still, Acheson said that he is very optimistic about Bitcoin’s long-term prospects. She sees a growing number of use cases and sees it as an investment in a new technology.

Crypto Could Get Worse Before It Gets Better

With crypto assets declining significantly, traders may wonder if the worst is over. But analysts still see plenty of risks on the horizon.

“Bitcoin price is not related to economic fundamentals, but sentiment is,” says Acheson. “Risk sentiment is going to get much worse: the market is not pricing in how aggressive the Fed is going to get.”

The past few months have tested investors’ faith in cryptocurrencies as an investment. TerraUSD, one of the so-called stablecoins meant to trade at $1, tanked to just a few cents, while crypto lender Celsius Network filed for bankruptcy. A court in the British Virgin Islands ordered the liquidation of Three Arrows Capital, a crypto hedge fund, in June.

“Institutional investors and major cryptocurrency exchanges are under pressure, with many on the verge of collapse,” says Tammy Da Costa, an analyst at financial markets site DailyFX. “Over the past two months, the collapse of Terra, Celsius, Three Arrows Capital, and job cuts by several key players (including Coinbase) are making a resumption of a bullish move even more challenging.”

A recession is not guaranteed

Although fears of a recession have risen and the US economy has contracted for two consecutive quarters, a definition of a recession, there is no guarantee that a recession will actually occur. The US economy added 528,000 jobs in July, according to the Labor Department, and the unemployment rate fell to 3.5 percent.

“Currently, we don’t think we’re in a recession or stagflation scenario at all,” says Dr. Martin Hiesboeck, head of blockchain and crypto research at digital money platform Uphold. “The situation is more like after World War II, when we had a few years of high inflation and slow growth before the world recovered from the impact of the war.”

“Solid digital asset projects with real economic utility will do well regardless of the macroeconomic environment,” he added.

David Duong, head of institutional research at Coinbase, said the crypto sell-off and solvency problems at companies like Celsius and Three Arrows are due to a mismatch between short-term lending and long-term illiquid assets.

“That has removed much of the excess crypto risk and consequently we may have seen the worst for the asset class this cycle,” Duong said.

Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making an investment decision. Furthermore, investors are cautioned that the past performance of the investment product is not a guarantee of future price appreciation.

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