Is Bitcoin Recession Proof?
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A global recession, like the one economists predict could happen next year, will put cryptocurrencies like bitcoin (BTC) in high demand, a new report has suggested.
Analysts at the cryptocurrency prime dealer, SFOX, said a global economic downturn may spark a sudden surge in demand. As cryptocurrency price movements are generally uncorrelated to the traditional markets, investors could move value into the asset class, particularly bitcoin, to protect value if the stock market crashed; the side-effect being virtual currencies would become more volatile.
The report said: “Given crypto’s lack of correlation with the stock market, a recession could prompt more demand — and, consequently, more volatility — in the crypto sector, especially in the case of BTC.”
The factors that influence cryptocurrency are considered independent to those that move the traditional markets. Crypto’s major price movements in 2018, for example, were instigated by events that directly affected the sector. The CFTC and SEC testimonies at the Senate Banking Committee in early February caused a $200bn rebound in the market; the SEC postponing its VanEck SolidX ETF ruling in August caused a $90bn wipeout.
None of these events had any discernible impact on the stock market. The two markets have remained uncorrelated. Although investors hold portfolios with both conventional and crypto assets, judgment calls will be made based on different factors.
What’s the case for recession?
The stock market has been on a near-ten year bull run but many think it is showing signs of slowing and going the other way. The high profile victims are those that were considered the safest a year ago. FAANG (Facebook, Apple, Amazon, Netflix, and Google) stocks saw a trillion dollars – at its nadir – wiped from their collective total value in Q4 2018.
Economists have anticipated a global recession – a decline in GDP in two successive quarters – for a year now. American economist and former US Treasury Secretary Lawrence Summers sees clear warning signs for economic downturn likely to happen. “The global economy is much more likely to suffer from a downturn than from overheating in the next two years,” Summers wrote in the Financial Times on Monday.
Poor industrial production figures from Germany, released earlier this week, suggests the German economy, the powerhouse of Europe and fourth biggest in the world, may have also entered into a recession.
But is Bitcoin recession proof?
The SFOX report argues that cryptocurrency prices would remain largely unaffected in a traditional bear cycle. This is what would make them more desirable for investors. Bitcoin especially would experience an uptick in demand which would upset the market balance, increasing price volatility.
But this will only happen if crypto is independent of the stock markets. It was certainly true in the past, but recent events suggest the markets are becoming correlated. Although the controversial Bitcoin Cash (BCH) hard fork, combined with the SEC ordering two ICOs to refund investors in mid-November, formed part of what sent a relatively stable market down a further $100bn, it coincided with a major drop in the NASDAQ 100.
A variety of factors makes it difficult to know what was most influential in sending crypto down the tube, but some figures highlighted that a decline in the value of tech stocks would likely effect something like cryptocurrencies; the two assets share the same sort of investors. Alon Rajic, CEO of MoneyTransferComparison.com, told Crypto Briefing at the time that: “The reason for the [crypto market] sell-off is the US stock market sell-off, nothing less, nothing more.”
This isn’t the only time crypto and stocks may have been correlated. Bitcoin’s market cap took a $4bn hit in early October at the same time that traditional markets around the world dropped in value. The Dow Jones, NASDAQ and S&P 500 all fell; Europe’s Stoxx 600 traded at its lowest levels since February 2017. Stocks in Japan and China dropped on average by around 3.5%. Crypto’s total value declined by around $20bn in the space of a morning.
It’s uncertain how cryptocurrencies would react in an economic downturn. As Mati Greenspan the senior market analyst at eToro highlighted in a webinar on Monday, the crypto market has never been through a bear cycle. It was created at the tail-end of a devasting one, sure, but has matured in the biggest bull run on record.
Asked how he thought crypto would fare in a bear market, Greenspan said: “we simply don’t know”.
Bitcoin is a risky asset
In periods of market uncertainty, the tendency is to withdraw from risky holdings. Crypto is a risky holding. It remains unregulated on a global scale, something highlighted as a cause for concern in yesterdays European Banking Authority report, and its ultimate utility remains uncertain. Price predictions have failed miserably.
The SFOX report is right to say bitcoin would be the coin in highest demand. The coin enjoys a peculiar position both as the most high profile coin and one treated, contentiously to some, as a commodity; ‘digital gold’. But against a backdrop of economic recession, it’s uncertain whether investors would see a high-risk asset as a safe haven.
The author is invested in digital assets, including BTC which is mentioned in this article.