Crypto during a recession: Here’s what to expect

Bitcoin, the largest cryptocurrency in the world, was created in 2009 during the depths of the Great Financial Crisis. It took a while to catch on, but it, along with other cryptocurrencies, has since exploded into a huge market worth around $1 trillion.

But with the broad crypto market falling sharply from all-time highs reached in November 2021 as the Federal Reserve raises interest rates to combat high inflation, many investors are wondering how Bitcoin and other crypto assets might fare if the economy slips into a recession.

Here’s what crypto investors should expect, according to the experts.

Crypto is not a safe haven

As investors weigh the possibilities of a recession or a stagflation environment, many are looking for assets to protect them from the potential storm. But experts say crypto is not the place to find it.

“I’m not sure crypto can be considered a safe haven given its volatility,” says Scott Sheridan, CEO of online brokerage firm tastyworks.

Popular cryptocurrencies such as Bitcoin and Ethereum have fallen nearly 70 percent from their all-time highs as investors rejected risky assets following the rise in interest rates.

Sheridan said he doesn’t see a turnaround in crypto prices until volatility, as measured by the VIX, returns to more normal levels.

“Until then, I think the combination of potential alpha in the equity markets and the developing state and subsequent turbulence in crypto is more geared towards speculation than sheltering from the storm,” he said.

So it will be difficult to outperform both equity and crypto investors until the recent levels of volatility subside.

No way to value cryptocurrencies

One of the main criticisms of cryptocurrencies as investments is that they have no intrinsic value, because they produce nothing for their owners. Your return is entirely dependent on selling it to someone else for a higher price. Legendary investors including Warren Buffett and Charlie Munger have strongly criticized the investment benefits of Bitcoin and other cryptocurrencies for this reason.

“Crypto is an investment in nothing,” Munger told the Australian Financial Review in an interview in July. “I won’t buy a piece of nothing, even if someone tells me they can’t make more of it.”

Even those with a more positive view of Bitcoin and cryptoassets acknowledge that valuing the digital coins is difficult, if not impossible.

“There is no established way to value Bitcoin,” says Noelle Acheson, head of market insights at crypto lender Genesis Global Trading. “It’s narrative driven – narratives can turn on a dime.”

Still, Acheson said she is very positive about the long-term outlook for Bitcoin. She sees a growing number of use cases for it and sees it as an investment in a new technology.

Crypto can get worse before it gets better

With the significant decline in crypto assets already, traders may be wondering if the worst is behind us. But analysts still see many risks on the horizon.

“The price of Bitcoin is unrelated to economic fundamentals, but the sentiment is,” Acheson says. “Risk sentiment is going to get much worse – the market is not appreciating how aggressive the Fed is going to be.”

The past few months have tested investors’ faith in crypto as an investment. TerraUSD, a so-called stablecoin meant to trade at $1, collapsed to a few pennies, while crypto lender Celsius Network filed for bankruptcy. Three Arrows Capital, a crypto hedge fund, was ordered to wind up by a court in the British Virgin Islands in June.

“Institutional investors and major crypto exchanges are taking over, and many are on the brink of collapse,” said Tammy Da Costa, analyst at financial markets site DailyFX. “Over the past two months, the collapse of Terra, Celsius, Three Arrows Capital and cutbacks by several key players (including Coinbase) have made the resumption of a bullish move even more challenging.”

A recession is not guaranteed

Although fears of a recession have been heightened and the US economy has contracted for two consecutive quarters, a definition of a recession, there is no guarantee that a recession will actually occur. The US economy added 528,000 jobs in July, according to the Labor Department, and the unemployment rate fell to 3.5 percent.

“For now, we don’t think we’re in a recession or a stagflation scenario at all,” says Dr. Martin Hiesboeck, head of blockchain and crypto research at digital money platform Uphold. “The situation is more like after World War II, when we had a few years of high inflation and slow growth before the world recovered from the shock of the war.”

“Solid digital asset projects with real economic utility will do well regardless of the macroeconomic environment,” he added.

David Duong, head of institutional research at Coinbase, said the crypto sales and solvency problems of firms like Celsius and Three Arrows are due to a mismatch between short-term loans and long-term, illiquid assets.

“That has taken away a lot of the excess in crypto risk, and it’s possible that we may therefore have seen the worst for the asset class in this cycle,” Duong said.

Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making an investment decision. In addition, investors are informed that past investment product performance is no guarantee of future price increases.