What to expect from cryptocurrencies in a recession

What to expect from cryptocurrencies in a recession - 4 types of economic downturnsWhenever President Joe Biden starts talking about a possible recession, the newspapers and the public start to distrust. Over the next few weeks, we expect discussion of whether the US is actually in a recession, but one thing is clear: we are staggering.

To get an idea of ​​the economy, a lot of attention is usually paid to gross domestic product (GDP) as a key indicator. If GDP falls for two consecutive quarters, we start talking about a recession.

Although a recession depends on a number of factors such as unemployment, industrial production, retail sales and income, many fear that a protracted recession is looming as macroeconomic factors such as inflation and supply chain problems are not occurring. solving with the speed initially hoped for.

With two consecutive quarterly drops in GDP in early 2022, by some standards, a recession has begun. Unlike the last great recession, however, there is a new asset class in the financial landscape that deserves to be evaluated.

What about cryptocurrencies?

Cryptocurrencies have existed, for the most part, at a time when the United States has never been closer to a protracted recession. Since the Great Recession, the only time GDP has entered recessive territory has been in 2020, when the COVID-19 pandemic began and economies around the world closed.

BTC is still a child

The cryptocurrency market hasn't been around long enough to get an idea of ​​how it behaves in the event of a significant recession. The first cryptocurrency invented was Bitcoin (quotation BTC) in 2009, and a lot has changed since then. However, there are some periods of poor economic performance over the past 13 years that we can analyze to get an idea of ​​what the future of cryptocurrencies could be in the event of a large-scale recession. 

One of the few periods of economic instability since 2009 occurred in 2015. After 2014, GDP grew, albeit at lower and lower rates each quarter, to reach a growth rate of 0,1% in the fourth quarter of the year. 2015.

In 2015, the S&P 500 recorded its first negative year since the Great Recession. During this time, the crypto asset class was completely bombed. The collective market capitalization of all cryptocurrencies has dropped nearly 70% since early 2014 before hitting a low in mid-2015. 

Another period of recent economic instability came in 2018. As in 2015, national GDP grew, but to a lesser extent each quarter and eventually fell at a growth rate of 1,3%. In 2018, the S&P 500 recorded the worst year since the Great Recession and lost 6% of its value. 

Cryptocurrency investors who have been around since 2018 are likely aware of the problems that year brought. After peaking at around $ 750 billion, cryptocurrency market capitalization plummeted and eventually dropped to just $ 107 billion, a catastrophic drop of 85%. Bitcoin went from around $ 19.000 to just over $ 3.000.

Opportunity is lurking

It is clear that cryptocurrencies are not spared in periods of slowing economic growth. Indeed, they are often the most affected. When fear of a recession, it is not uncommon for cryptocurrencies to lose three quarters of their value. But in these times there is a positive side.

Investing in the lower end of these cycles, in 2015 and 2018, would have produced monumental returns. Since Bitcoin represents a very large share of the cryptocurrency market, we will use it as a proxy to measure the opportunity that potentially awaits us in 2022. 

If you invested $ 1.000 in Bitcoin when it hit its low in mid-2015, that $ 1.000 would have been worth more than $ 80.000 in 2017. Suppose you bought the 2018 cryptocurrency winter fund. Those $ 1.000 would have been worth nearly $ 20.000. if you held out until Bitcoin hit a new all-time high in 2021.

As long as fears of a recession persist, cryptocurrencies will likely struggle to make significant gains. Investors willing to take advantage of these depressed prices to lower their cost base could position themselves for gains similar to periods such as the 2017 or 2021 bull runs.

No one can tell exactly when economic sentiment will change, so you shouldn't try to time the market. But when macroeconomic conditions improve, we can expect cryptocurrencies to recover just like the economy has done in the past. 

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