Bitcoin (BTC) is Setup to be a Recession Reviver or a False Messiah in the Making
Historically, in the US, the actions of the federal reserve has had a massive bearing on the economy. In a contracting economy, a lower interest rate might get companies to borrow more and inject the money needed to buoy it up. The reverse happens when the central institutions want to spur up savings and thus increase interest rates. On Wednesday the Federal bank raised its benchmark interest rate by a quarter point, a decision that dismayed US President Donald Trump, but surprised none.
The financial situation, at the moment, is stable with the economy raising 3 percent for the year; yet it is down a fraction from last quarter. Many economists have advised that the current market looks poised for another recession. This is despite the fact that the economy has been steady and mostly growing. This uncertainty comes at the behest of the uncertain nature of the market itself, the source of a slump. In fact, it was in the womb of the greatest recession of our generation, that the blockchain was born.
Satoshi Nakamoto had created a digital currency, the bitcoin, using the Blockchain technology to weave away from the centralized control and uncertainty inherent with fiat currencies of today. Though its success after a decade is still up for debate, its impact is not. Many large institutions (world bank and IMF) and companies (Goldman Sachs and JP Morgan) have been toying with the technology. For good reason, they are exploring the options in case of another market collapse.
One Coin To Rule Them All?
There are a couple of speculative possibilities should the alleged impending financial downturn come to pass. Either the highly volatile digital assets market will get washed away along with the global markets, Or countries will begin to embrace digital currencies. The latter will ring the death knell of fiat currencies. If it was to happen, undoubtedly the current market leader by a long stretch,Bitcoin will be the logical choice to convert to.
This idea has attractive merits. The most important being that hyperinflation would be impossible. For Germans of the interwar period or the Zimbabweans of the near past, the overprinting of money was a disaster perpetrated by their own governments. When such a situation arises the masses lose faith in the currency and look to use other assets, such as gold; a stable digital asset would do just as well.
Another advantage is to cut out intermediaries from a financial transaction. Over the centuries, the Venetian and Arab system has evolved into a bloated financial mess. This means transactions involve middle-men who increase transaction fees and cause higher turnaround times. With each iteration, Cryptos eliminate and address both these concerns by having quick transactions coupled with low costs. This will no doubt appeal to those who are looking for other options
This is not lost on the authorities and the business community. As mentioned before, this is the main reason the blockchains viability is being studied by everyone to see how best to incorporate it into the existing setup; or even how to migrate to it.
As one considers the market mayhem of this year, the incredible fluctuations in prices and the fall in value, one would do well to consider a few facts. As pointed out by investor and self-professed bitcoin enthusiast, Mike Novogratz. He observes the performance of Bitcoin from a long-term perspective, compared to other traditional stocks.
“If you bought Bitcoin two years ago vs the S&P or any other asset, you’re still up more, if you bought Bitcoin two years ago vs gold, you’re still up more. So, you’ve got to sometime step back from the immediate and look at the slope we’re going on, it’s actually close to a miracle that some guy created a program and 10 years later still has $80 billion of value as a digital store of value.”
This, at a time when Bitcoin has already shed more than 80 percent of its value.
A Plan B?
While a large percentage of the global population is aware of digital currencies, not many own them; thus converting to them might not be simple or viable for them. Like most of today's currencies, Bitcoin too is an uncorrelated asset, that is its value is not backed by anything that is tangible. Thus it is a fair assumption that incase of a market panic most would start by selling off digital and speculative assets.
In such a scenario the safety of centuries-old tangible assets, would be the best bet and, undoubtedly, be looked towards. This would be expected as most wouldn't have much trust in a decade old asset that is prone to massive swings in prices. This is what was evident in the recent sell-off spree when investors clearly panicked and prices plummeted to less than $3300.
Lastly, Bitcoin is largely untested in a true recession case. As its value is null outside the digital ecosystem, it is largely unknown if this will be just like any other speculative asset or will react differently.
For its part, the US Federal Reserve has already taken meaningful measures and announced its future plans of further, albeit gradual interest hikes. This measure should deflate the currency and arrest inflation.
Recessions have a habit of showing up unannounced, though there are certain indicators of a recession on the horizon. Centralized agencies are certainly doing their bit to reel in this eventuality and try and ease its impact. It will be worth noting how people react. Will it usher in the age of digital currencies relegating the current currency systems to history books. Or will it be another high-risk asset that will be rejected, confined to drawing room chats of cypherpunks and anarchists? Either scenarios have set up an intriguing story for the new decade.