Bitcoin vs A Global Economic Recession: Will BTC Be A Safe Haven During Market Chaos?
Recession, What Is It Good For: Maybe Crypto
Crytocurrencies have been unlucky in acquiring the status of a niche product. Even though blockchain has gained a respectable reputation, that has not translated to faith in cryptos. The market leader, Bitcoin is often seen as the definitive direction that the overall industry is taking. There has been a lot of talk conceding that Bitcoin could be used by financial institutions to hedge against risk's of inflation, productivity or trade imbalances. Yet, till now, nothing substantial has come to fruition.
Bitcoin has often been compared to gold, with the expectation being that cryptos will be the next “store of values”; Bitcoin being the leader will be the obvious choice of investors. And just like gold, it is expected to fare rather well during times of market downturn. This has led to a common conversation about a global recession or some such thing that will push people towards accepting cryptocurrencies.
A Naive Solution To A Complex Problem.
While this sort of shock solution might see a few people switch over to cryptos, there are other factors that need to be considered. Excess income, for example, will be affected by a global recession. With economies shrinking everywhere, there will also be a regression for the demand for skilled labour. This will directly affect the amount people will be willing to put into investment and speculative ventures. The whole crypto verse, for better or for worse, is tied to the traditional economy. Thus, even Bitcoin (seen from the lens of being a stable store of value) is bound to be adversely affected in case of a large scale financial catastrophe.
Another case to consider is if a leading economy, say for example the slowing Chinese markets, falls into a recession, it will have a rippling effect on other economies, making it hard for anyone to use the opportunity to switch to digital assets. Similar to Venezuela which already has an imaginable inflation rate, making their Bolivar virtually useless. Yet implementation of a digital solution would be hard in both circumstances ( China or Venezuela) as the economies are deeply intertwined with other countries.
Even if there is a large scale recession, the value of some internet based idea is unlikely to be thought of with any sort of priority. People are much more likely and would rather simply exchange goods than put in the effort of learning about this advanced solution.
In a volatile market there might be some who would undoubtedly look at bitcoin but it is unlikely that there will be enough. There might be a fair few who might look at alternatives such as Stablecoins, but those will be mostly to acquire foreign currencies, as is the case today with countries like Iran.
One should also remember that with tumbling Fiat prices even if the value of the asset grows, the holder is more than likely to cash it out. With failing financial health the repurchase of such assets becomes harder which makes traders and institutions reluctant to purchase and thus depresses the market.
A More Nuanced Answer In The Future
The Western economies have predominantly shied away from the Soviet style planned economies, however, this has led to a situation where a recession seems on the horizon. A fear that has piqued the interest of many to search for an alternative economic model. After all herein lies the true appeal of crypto assets.
One economic model touted is a closed looped crypto economy. This is still in a very early stage of deployment and basic issues like assuring supply and getting merchants to adopt it has to be worked out. Working on this in conjuration with the community still seems like the most potent solution. Bitcoin without its own economy is likely to fall into the same traps of a fiat currency in times of a recession.
The performance of Cryptos, in case of any issues, realistically depends on what we’re talking about. In the short term investors will readily give crypto-currencies a chance and might even convert their assets, but only in the short term, if the markets remain depressed it is hard to see cryptos not getting affected. Thus, only in closed loop economics where money enters but doesn't quickly leave, is this of any use. Yet it must also be remembered that, at the moment, there is no such thing as a closed loop.
For cryptos to actually gain any sort of prominence, 3 things are essential: Business adoption, easy access and stability. Without these factors, a recession will not really help. It might drive the prices up in the short term, but there is only likely to be a negative impact overall. Thus wishing ill for the current traditional set up will almost certainly backfire on this young industry.