Poll: If You’re A Stockowner Or Crypto-Currency Holder. What Will You Do When The Recession Comes?
What Will Bitcoin Do In A Recession?
The answer to this question depends on the type of recession as well as the conditions that caused it, as Dan McArdle of Messari pointed out. The two largest depressions in US history were deflationary, and a light-to-moderate recession is likely if history is telling.
There Are Two Possibilities For A Recession:
- Light To Moderate Recession (Liquidity Crisis)
- Sovereign Debt Crisis / Currency Crisis
In the more likely probability of a liquidity crisis, Bitcoin investments will perform poorly, but they are likely to outperform the market in a currency crisis.
A light-to-moderate recession (liquidity crisis) would be characterized by calling debts due and a flight to cash to pay off those debts. It would be hard to get loans, and people would move out of their risk assets in return for dollars to pay their debts. This move to cash decreases the value of risk assets. Bitcoin would be sold for dollars, and its price would fall in accordance with every other light-to-moderate recession to date.
Fiat’s Difficulty is Bitcoin’s Opportunity
The “bull case” for Bitcoin is when a moderate recession starts to boil over into a sovereign debt crisis or currency crisis. If the general public starts to question whether or not central banks can maintain the nation’s currency – that is Bitcoin’s time to shine.
We can look for an example of this “bull case” by comparing Bitcoin to gold (which has yet to be proven as a store of value in a time of need).
The last US recession had an initial liquidity crisis and the price of gold followed the markets when people put their money into cash to pay off their debts – following the typical cycle of a light-to-moderate recession.
The eurozone debt crisis was the world’s biggest problem in 2011, but the crisis started in 2009 when the world first realized Greece could default on its debt. Poor European fiscal policies led to concerns about the Union’s ability to keep the euro afloat, sparking a capital flight to gold. Gold reached an all-time high (see below). If we accept that Bitcoin will behave like gold as a store of value, then Bitcoin would probably perform very well in a combined recession-and-sovereign debt crisis. However, this event is much less likely than a smaller recession.
While most people think a tanking economy is good news for Bitcoin, that narrative is too simple. The most likely eventuality is that Bitcoin will perform similar to other risk assets.
That doesn’t mean that Bitcoin’s value proposition is broken; simply that it will perform differently in different types of recessions. In some recessionary scenarios, it will not be an effective hedge.
There are also scenarios where, unlike equities and cash, Bitcoin could perform well. However, a liquidity crisis in a recessionary period is not one of them, trader superstitions aside.
The idea that Bitcoin is a refuge from inflation has limited usefulness. Bitcoin has other positive attributes, including its ability to be a global digital cash that can be sent anywhere in the world within minutes. Most non-fiat productive assets are hedges against monetary inflation in the developed world; it’s time to stop propping up the myth that Bitcoin exists to save us from a recession.