Crypto vs. Recession
It is hardly a coincidence that the first cryptocurrency, Bitcoin (BTC), was created only a year after the Great Recession took place in 2008. At the same time, that means that there was no cryptocurrency before the recession, so analysts looking into Bitcoin history can only presume what would happen to BTC and other cryptos based on what is happening amidst the virus outbreak and the post-COVID-19 crisis. Digital currencies, in general, are designed to renounce centralized authorities and traditional banking systems. According to Bitcoin’s whitepaper, Satoshi Nakamoto openly states that the first crypto ever to be created is meant to represent an independent and secure, as well as transparent, monetary system that would replace central banks. With that in mind, what would happen to cryptocurrency in case of an economic crisis? Will crypto survive a recession?
The Predicted Economic Downturn of 2020 vs. Cryptocurrency
With the COVID-19 outbreak, predictions that were far lighter before the fallout became more focused on a certain wave of economic crisis. Cryptocurrencies have never faced an economic downturn, and it is becoming more likely that a global crisis will arrive at the end of 2020 as two-thirds of economists who were surveyed claim. Economists can predict the outcome of a potential recession in the market of stocks and other traditional assets. However, it is less likely that a consensus could be made in the case of forecasting the market of digital assets in a potential economic downturn. By far and for years, cryptocurrencies were developing and growing amidst market expansion in the US. Since the launch of Bitcoin, GDP (Gross Domestic Product) increased from -1.73% to 3.138% in 2017.
Recorded from 2009 to 2017, the rate of unemployment also declined, dropping from 10% to 4%. It was in 2017 that Bitcoin surged to its record high of $20,000 at the end of the year. At the same time, favorable economic conditions might have taken away the opportunity for some investors and traders to see some intrinsic qualities that digital assets have to offer. Countries that are already experiencing a grave recession, such as Venezuela, for example, have already tested cryptocurrency, Bitcoin in the majority, finding the original crypto to be a “safe haven” even in case of devaluation of the national currency. By investing in Bitcoin, Venezuelans who decided to exchange national currency for BTC could slow down devaluation.
Will Bitcoin Go Up If the Market Crashes?
Bitcoin holds over 60% of the total market capitalization of all cryptocurrencies, while it also represents a “safe haven” for many investors and traders due to its decentralized nature and scarcity. Bitcoin serves the purpose of transacting monetary value, while investors may HODL (hold) or exchange their BTC units with other fiat and digital currencies in accordance with market trends. Unlike other alternative digital currencies, i.e. altcoins, Bitcoin doesn’t provide a platform for Dapps, enterprises or foundations, which is why it is more likely that BTC would perform independently from the rest of the market.
Since BTC acts more as a commodity than equity – much like gold is considered to be a safe harbor – Bitcoin is more likely to rise in the case of recession as many investors are likely to turn to BTC. With a major rise, a downturn is likely to follow with traders who would be willing to make a profit by buying low and selling high.
How Will Cryptocurrency Market React in Case of Recession?
Not all cryptocurrencies are the same, just as different companies in a single market have different business models, revenue, profit, strategies and market share. That is how it is logical that not all cryptos will react in the same way in case of recession. While it is considered that Bitcoin is likely to perform independently compared to the rest of the market, nearly 2,000 other cryptos are likely to follow trends. To analyze the potential outcome of a recession in the crypto market, several different cryptos could be analyzed based on the market value, trading volumes, historical metrics, application, services, architecture and utilization.
The top three cryptocurrencies, Bitcoin, Ethereum and Ripple’s XRP are all different in structure, application and utilization, as well as in market value, which is how it could be useful for the sake of prediction to analyze BTC, ETH and XRP. Bitcoin is most likely to rise in the time of crisis, acting similar to gold as Bitcoin offers no other services aside from holding BTC, trading or transacting value. Ethereum, on the other hand, is a platform built for developers, enterprises and businesses to use smart contracts to digitize ownership, tokenizing value, signing contracts and building and using digital apps (Dapps).
That means that ETH is likely to be affected by a potential crisis as businesses would be affected. Ethereum’s value is more so determined on its application, which as a consequence, brings ETH to a decline in case businesses start to lose profit. Ethereum depends on developers and businesses using Dapps and platform tools, which is how it could follow trends of recession, unlike Bitcoin. XRP might also survive the recession as its price wouldn’t go through a severe drop in case of crisis as Ripple operates within the mainstream waters of financing. Nevertheless, XRP could follow recession trends if adoption slows down or regresses. In the long-term, the recession has proven to separate weak from strong projects across different markets, which is how it is certain that the strongest and most valuable cryptocurrencies are poised to survive.