There is a sense that we are heading toward a global economic slowdown. Some say, we will experience a mild recession in 2020 while others think this will be as big as 2008. That prompts an underlying question that many crypto lovers ask:
What happens to bitcoin when a recession hits?
Will bitcoin survive a financial recession?
Will recession kill bitcoin?
What happens to bitcoin price if a recession hits?
If someone says they have an affirmative answer to these questions, they are just playing you for your money because no one knows for sure. However, we can look at the common market patterns and experiences we have gone through since bitcoin’s inception to draw probabilities that might help.
Let’s break it down in simplistic terms.
Topics discussed under the Green category below are all in favor of bitcoin performing well in the event of a recession and topics in Red are the ones that may work against bitcoin.
Green: Bitcoin is still a nascent technology
In the world of progress and adoption, bitcoin is still in its infancy. This means two things:
- People do not know whether they can truly trust it or not
- It has wild upside potential
To address the first point, bitcoin only has 35 million wallets as of 2019. 35 million represents 0.00897435% of 3.9 billion individuals with internet access. To reiterate, that’s 1% of 1%.
When thinking about blockchain and bitcoin, we have to think past people with bank access and people without it because blockchain promises to wipe out that difference. So for our purposes, we have to consider every single internet user as a potential bitcoin user of the future.
As I said at the beginning, we haven’t even started our journey when it comes to bitcoin and Cryptocurrencies.
From a potential perspective, we are yet to see a 1000+ fold in potential adoption. This sentiment is supported by Clem Chambers’statement“the whole cryptocurrency space is still only the size of a single Nasdaq blue chip, so there is a long way to go yet.”
Just to reiterate that statement, the whole cryptocurrency space is at a size of single Nasdaq blue chip company; One company. What happens when bitcoin alone reaches the market cap of Amazon?
Red: This 1000 fold potential also indicates ignorance among the masses
What is not even adopted by 1% can be easily forgotten or ignored by 99%.
During the period of a recession, people don’t think about HODLing or a bright technological future or a decentralized utopia; they think about keeping a roof over their heads, food on the plate, and safety & wellbeing of their loved ones.
This means we may even lose some early adopters and speculators in the 35 million list to the real FUD that the recession could induce.
A recession could mask the rational judgment of the pragmatic amongst us. This will be truer in case of those who flocked to bitcoin in the hopes of becoming millionaires overnight. They will be the first one to be scared out of bitcoin when the market goes to dumps during the recession.
These sellouts will cause mass hysteria and panic, which will further worsen the situation before the true visionaries and those with a long-term mindset endure the turbulent waters of a recession.
Green: Failing fiat systems could fuel bitcoin adoption
Inflation. Failing fiat.
When inflation rises to uncontrollable levels, people hesitate to buy gold because it is easy to steal, difficult to carry around, and needs to be converted to fiat to spend. As a result of these inherent issues, some people have been turning to bitcoin, which is safe to hide with private keys, easy to move, and has been steadily increasing in value, much better than gold.
The U.S. National Debt has reached a whopping 22 Trillion dollars. Printing money to pay off this debt will simply not work, anymore.
When people realize that Russia, China, and North Korea are accumulating bitcoin alongside gold to back their fiat, and that the U.S. is sinking under the weight of its own debt, it will be difficult to trust the fiat that is backed by the big nothing.
This realization could work in bitcoin’s favor since it is the only currency with worldwide recognition and absolute zero need to rely on one authority or the other.
Red: USD reemerges as the world currency in case of a war, recession, or depression
According to some theories, whenthe USD weakens, there will be a recession or a war, and sometimes both.
This forces the nations around the world to put their faith behind the Green almighty. The U.S. invests in its national security heavily and does not shy away to showcase its power once in a while to keep the place of its U.S. Dollar intact.
In the event of a recession, the 99% we talked about earlier will be laboring for dollars. Since a recession marks pay cuts, job cuts, and an inherent shortage of fiat dollars in the hands of common households, the U.S. dollar quickly becomes the safe haven again to survive.
This scenario could work against bitcoin.
Green: Logistics issues around gold could prompt a bitcoin rally
Every time we talk about bitcoin in the context of the store of value, we inevitably compare it with gold. Most people in the current workforce or those who are just venturing into the workforce may not know that the U.S. Government at one point outlawed gold.
During the FDR era, gold was outlawed overnight, and people were forced to surrender their gold to the government.
Even when gold is legal, there are numerous restrictions on moving physical gold. First of all, it is a metal; that means it is heavy to move anywhere. If you move gold to another jurisdiction in substantial quantity, you will probably have to disclose it to the customs and may invite unwarranted attention from every single federal agency.
Moving 1000 grams of gold worth $45,000 (June 2019) will bring a lot of attention, and even if you succeed in moving it, how are you going to liquidate it safely?
To move $45,000 worth of bitcoin will take nothing more than a piece of paper with private keys or your phone with a secure wallet, with zero interference from any outside force.
Many outlets are springing across the globe that either accept bitcoin directly or convert it for you at competitive rates to any fiat you desire, to the fraction you need.
This convenience could slowly gain traction for bitcoin from gold aficionados.
Red: Gold has been in existence since the birth of the financial system
While logistics work in bitcoin’s favor, history favors gold because it is the oldest form of money known to man.
People trust gold because you can touch it, store it, and sell it when you need to. Gold has held its value steadily over the centuries.
Bitcoin, on the other hand, lives in the digital world and continues to swing up and down wildly; sometimes dipping 80%. This volatility has deterred many concerned investors from putting their faith in bitcoin.
Green: Bitcoin has been the best performing non-correlated asset, ever
Bitcoin’s performance over the last year (even during this crypto winter) or to that matter even close to a decade has been unmatched. There is even a math around how if you were doing dollar-cost averaging irrespective of bull or bear markets, you would come out with a decent upper hand; we are talking double digit gains.
If bitcoin lives up to its non-correlated asset narrative, then theoretically, when the traditional markets sink and gold stabilizes, bitcoin should move in the opposite direction. Even when everything comes back to normal and slow pace of normalcy is returned, bitcoin should perform on its own terms.
This independent movement may give bitcoin the needed attention during the time of recession and push it higher.
Red: Gold and USD are backed by trust of nations
While bitcoin is people’s currency, it is still in its first decade. That is infancy in the finance world. Gold and USD have been cornerstones of our financial system for the longest. Gold especially has been in use since humans evolved out of barter system.
The USD is backed by the great strength of American armed forces and hard work of the people that toil to earn their wages in dollars.
When a recession takes place, people are going to trust what they have accustomed to trust all their lives. They may not put faith in something that they hardly know about.
Green: All classes of people can participate with no minimums
Bitcoin is not controlled by governments or financial institutions. Anyone can invest in it, whether through an institution or buying it from other individuals who own it. Owing to the fact that there are no minimums, everyone gets a fair shot at investing in it.
In the traditional world, only super-wealthy or accredited investors get to invest in the ground floor of lucrative projects. Blockchain and cryptocurrencies are changing that unfair culture.
This means, there is a possibility that when fiat bubble bursts, people flock to bitcoin and a few handfuls of crypto projects.
Red: Highly manipulated space
Because there are little to no-restrictions (although this is quickly changing), many questionable practices are thriving in the crypto space.
The rumors around Tether pumping the prices of bitcoin to benefit its own wealthy customer base have made rounds in the crypto circles for some time.
Many exchanges have shut their doors and vanished with all the funds. Many people were scammed into investing in con projects using outright unethical marketing practices.
During a market panic, one such story of crypto scam could send the whole market tumbling down, taking bitcoin along with it.
Red: First recession may be the toughest for bitcoin
While bitcoin is used to facing volatility of 85% and yet continue to march on, an actual financial recession might put unprecedented stress on such a dip.
As bitcoin has never been through an actual recession, it could have a drastic negative impact, at least at the outset, on it.We wouldn’t be surprised if prices slash down to 80% from its peak.
This potentiality of the wild dump in case of a recession will force some blockchain companies to close their shops since they will not have the fluidity to run the business using crypto. This further increases the selling pressure in the market – lowering prices even further.
Green: First recession may be the last recession that bitcoin will ever face
After bitcoin goes through its first recession, the narrative around it being a non-correlated financial asset and a better store of value will catch on. When this happens, bitcoin will steadily find its ground and will start its uptrend.
Unlike gold, bitcoin’s finite supply may help drive its price higher each year making it better than gold for those who are looking for a safety net that can withstand or beat inflation.
Green: Finite supply of bitcoin will help its value
Bitcoin’s finite supply and its halving event have always pumped the value of bitcoin. Now that more people are assigning a small portion of their portfolio into bitcoin and institutions are entering this space, the demand is constantly rising while the supply shrinks.
It is a simple economic principle. When demand is high and supply is limited, the market sets the price at a premium.
When this factor plays out, even during a recession, people will continue to put money into bitcoin to keep it afloat or thrive during the economic meltdown.
Red: A bitcoin alternative currency could kill the bitcoin mania
Although a long shot, it is still in the realms of possibility that an alternative much better than bitcoin, both in terms of network strength and trust, could emerge that could send bitcoin to the dumpster.
Just to set the record straight, we are big fans of bitcoin. However, when considering the pros and cons, we have to be ruthless about what factors could work against bitcoin.
MIT announced that it has developed a cryptocurrency that reduces data users to join the network and verify the transactions by 99%. Of course, new types of cryptocurrencies do not mean bitcoin is going to be made redundant tomorrow; however, it may drag its price down dramatically.
And if such innovation is announced during a recession by a reputed body (like MIT or Harvard or NYSE) – then that could hurt bitcoin really bad.
Based on all the factors discussed above, you can draw your conclusions and place your bets on the scenario you think will play out the most.
In our opinion, even with a temporary dump of bitcoin in the event of a recession, things should bounce back quickly to help bitcoin find its ground and get back on its uptrend.
Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.
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About the author
RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.
RK Reddy is an ardent fan of Blockchain and Cryptocurrencies. You can see the excitement about this new blockchain technology in every article on Cryptotapas.com. Sometimes this excitement leads to an overly optimistic view. Guilty as charged. RK Reddy says “what may seem like an ‘overly optimistic expectation’ today may become an everyday norm in 5-10 years; look at the history of cars or airplanes, Blockchain and Cryptocurrencies belong to a similar frame of reference.” Of course, that is just his opinion.