Can Bitcoin Grow During a Recession? Fiat’s Difficulty is Cryptocurrency’s Opportunity

There are some economists and experts that believe that the world will be experiencing a new recession in the short- or middle-term. This recession could be linked to the United States and its economy. Bitcoin speculators and investors believe that the virtual currency could rise during recession periods. However, this could not be the case.

During typical recessions Bitcoin would be sold as other high-risk assets in the market. However, the most popular virtual currency could soar during a sovereign debt crisis. According to the mathematician Qiao Wang, Bitcoin is a hedge against inflation rather than a hedge against recession. In a tweet answering Anthony Pompliano, founder and partner at Morgan Creek Digital, the mathematician explained that inflation and recession are orthogonal concepts.

A recession is related to a declining economy during two successive quarters. For example, Nouriel Roubini, a recognized economist that is completely opposed to virtual currencies, said that the US’ increasing debt could be a big problem for the economy. For him, these factors could play an important role in the upcoming recession. Roubini is also known for predicting the 2008 financial crisis.

At the same time, in the last ten years, there was a bull run in the US equities markets. This is why the Federal Reserve raised interest rates three times during the current year. That suggests that the US economy could also experience a downturn in the near future. Nevertheless, a recession will happen, but no one knows when it will start.

There are some Bitcoin enthusiasts that believe that Bitcoin could work as an anti-cyclical asset. Investors could run to Bitcoin if it would work as a hedge against recessions. There is an assumption that says that Bitcoin is disconnected from the financial system and that it is negatively correlated with the equities market. If equities fall, Bitcoin prices rise.

Nevertheless, during the current year, it is possible to see that Bitcoin has been increasingly correlated to the S&P 500. In the following graphic, it is possible to see that Bitcoin never had a high negative or positive correlation with the S&P 500.

Additionally, this graphic shows that Bitcoin was even less correlated with gold than with the S&P 500.

How will Bitcoin behave during a recession is not clear. According to Dan McArdle, co-founder of Messari, Bitcoin is a hedge against inflation and loss of confidence in fiat. This is similar to what Qiao Wang explained. Mr McArdle explained that the two largest depressions in the United States were deflationary.

He marked that there are two different possible recessions ahead, a light or moderate recession (liquidity crisis) or a Sovereign debt crisis and a currency crisis. In the case of a liquidity crisis, Bitcoin will perform in a poor way. People would sell Bitcoin so as to pay off debts, bills and other things.

Bitcoin would have a bullish moment if the moderate or light recession turns into a debt or currency crisis. That means that if people believe that the central bank is not able to maintain the value of the currency, Bitcoin could grow. In this situation, Bitcoin could be compared with gold rather than with other assets.

During the last recession in the United States, gold followed the markets. People were selling their gold reserves in order to pay for their debts. However, gold spiked when the debt crisis in Europe exploded with Greece not being able to pay for its debt.

If there are a recession and a sovereign debt crisis, Bitcoin could perform very well. Nevertheless, such a recession might not happen in the next years. The probabilities are very low.

This goes against what most of the cryptocurrency enthusiasts think about Bitcoin. An economy that is falling in a moderated way without becoming a debt or currency crisis could see Bitcoin falling rather than growing. Nonetheless, Bitcoin could grow if this crisis becomes bigger and changes to a debt or currency crisis.

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