Crypto During a Recession: Here’s What to Expect

Bitcoin and some other major cryptocurrencies have experienced a tumultuous time over the last year and a half. The upward movement can be attributed to the Federal Reserve’s announcement of increasing interest rates to combat inflation. These higher rates caused cryptocurrencies and other assets, such as stocks, to take a nosedive. It’s true that the market has been expecting a recession very soon, but how exactly will cryptocurrencies fare in a recession?

Also read: 10 Common Cryptocurrency Scams in 2023

Reasons Why Crypto Is Not a Safe Haven

Many educational resources and other sources declare cryptocurrencies to be safe havens in times of economic turmoil. While cryptocurrencies have been used in the past to protect investors from troubling losses, experts now say that cryptocurrencies aren’t the solution.

Popular cryptos such as Bitcoin and Ethereum have decreased more than 70% from their all-time high values due to investors shunning risky assets after the interest rate increase. However, cryptocurrencies have started to recover in 2023 as the market remains optimistic about an end to rising rates. Major cryptocurrencies are still well below their peaks.

It remains to be seen how the Fed reacts when it becomes clear that a recession is inevitable. In an effort to spur the economy, the central bank could lower interest rates, which can help put a floor under cryptocurrency prices. However, this has to fight against the tendency of traders to avoid risk in a recession. Investors should also note that Bitcoin may not fare as well as other cryptocurrencies during a recession. This is because the factors that affect major cryptocurrencies may not have an effect on smaller tokens.

Cryptocurrencies Cannot Always Be Valued Properly

Another problem with relying on cryptocurrencies during recessions is the difficulty of valuing them properly. This is mainly due to cryptocurrencies not having any intrinsic value, and the returns are produced by selling them at a higher price. This aspect of cryptocurrencies has been criticised by traditional investors such as Charlie Munger and Warren Buffett.

Those who have a positive opinion of cryptocurrencies such as Bitcoin also acknowledge that valuing them is difficult, if not impossible. Despite this, many investors are still very bullish on Bitcoin’s long-term prospects as more and more use cases for it emerge.

The Risks of Cryptocurrencies During Recession

Cryptocurrencies have already suffered a significant decline but have recovered in recent months. This has led many traders and investors to think that the worst is behind them. However, analysts still detect a lot of risks for cryptocurrencies moving forward. Some of the sentiment-destroying news that has tested the faith of investors over the last few years is mentioned below.

• The collapse of the TerraUSD stablecoin decreased its value to a fraction of its original price.
• The bankruptcy of a US-based crypto lender, Celsius Network.
• The liquidation of crypto hedge fund Three Arrows Capital on orders of a British Virgin Islands court.
• Popular exchange FTX filed for bankruptcy after fraudulent activities.
• Crypto exchange Bittrex closed its operations in the United States and filed for bankruptcy.

Advantages of Investing in Cryptocurrencies During a Recession

While there are concerns about investing in cryptocurrencies during a recession, they still provide certain benefits compared to other financial instruments.

Potential Hedge

Apart from a few major cryptocurrencies, other tokens have shown low correlation with traditional asset classes such as bonds and stocks. This suggests that crypto can potentially act as a hedge against economic uncertainties. Some cryptocurrencies have performed quite well during economic downturns, providing portfolio diversification benefits.

Liquidity and Accessibility

Investing in crypto is relatively accessible to individuals, as it just requires a digital wallet and an internet connection. The market operates on a 24/7 basis, offering high liquidity and the ability to buy and sell the tokens quickly. This liquidity has been an advantage during a recession when traditional markets are experiencing turmoil.

Technological Advancements and Adoption

During a recession, blockchain technology and cryptocurrencies can benefit from increased adoption and utilisation in various industries. This can drive up the value of cryptocurrencies, making them attractive investment options during economic downturns.

There Are Chances of the Recession Not Happening

While it’s true that there are elevated concerns about an upcoming recession, there’s no guarantee that it will occur. Even in the face of rising rates, the United States economy continues to add jobs, with the unemployment rate remaining at or near an all-time low. If there is a slowdown and a subsequent bounce in economic activity instead of a recession, traders’ sentiments on crypto and stocks may also rebound.

Cryptocurrencies and their values can be propelled higher as risk appetite returns. The best thing for investors to do right now is to disregard broader macro issues and focus on individual currencies with potential instead.

Frequently Asked Questions

What Are the Risks of Investing in Cryptocurrencies During a Recession?

Investing in cryptocurrencies during a recession can carry with it certain risks, such as market volatility, regulatory changes, potential security vulnerabilities, and the challenges that come with this rapidly evolving industry.

Should You Time the Market and Try to Buy Cryptos at the Lowest Point During a Recession?

When it comes to cryptocurrencies, timing the market is challenging and can be risky. Instead, it is recommended that traders take a long-term investment approach, focusing on the fundamental value and long-term prospects of crypto. Using Dollar-Cost Averaging (DCA) can help mitigate the impact of short-term volatility.

How Should Traders Diversify Cryptocurrency Investments During a Recession?

To mitigate risk during a recession, traders can consider diversifying across different cryptocurrencies, stablecoins, and traditional assets. They can also explore investing in projects with different use cases and market exposure.