While opinion is still divided on whether the United States and much of the world is heading for a recession any time soon, an increasing number of economists think it is likely. Some of the increased interest in Bitcoin is because speculators believe the price of Bitcoin will rise in a recession, others believe exactly the opposite. What are the facts?
Cryptocurrency behavior will likely depend on what creates the recession. In a typical recession, Bitcoin would be sold down like any other risk asset, but it would thrive in a currency or a sovereign debt crisis. Bitcoin works as a hedge against calamity, not recession; it’s most likely to rise when there is inflation and declining trust in government.
A recession is defined as a declining economy for two successive quarters, and two-thirds of CFOs responding to the most recent Duke survey see a recession hitting the U.S. by the end of 2020.
Nouriel Roubini, one of few economists to predict the housing crash of 2008, has recently emphasized the US’ increasing financial obligations in mortgages, student loans and credit card debt. Roubini is confident that we will see a financial crisis by 2020. Many crypto enthusiasts suggest “shorting bankers and longing Bitcoin” as an anti-recession hedge. Their reasoning is that, since Bitcoin is disconnected from the financial system and negatively correlated with equities markets, Bitcoin prices will rise if equities fall.
However, Bitcoin has become increasingly directly correlated with the S&P 500. Bitcoin also seems to be less correlated with gold than it is with US equities which is interesting considering that the “Bitcoin will rise in a recession” theory seems to be based on its similarity to gold. This, incidentally, is also poor reasoning: gold doesn’t flourish during a recession, so much as it suffers less than equities. Although gold is a better refuge than the stock market during a liquidity crisis, neither choice is optimal.
So, what is Bitcoin likely to do in a recession? This depends on the type of recession as well as the conditions that caused it. There are two possibilities for a recession, an acute shortage of liquidity or a sovereign debt crisis when a country cannot pay its bills. 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.
In a liquidity crisis it is 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 to raise cash, and its price would fall. However, if the public starts to question whether or not central banks can maintain the nation’s currency, Bitcoin’s may do well. 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 not be an effective hedge and will perform similar to other risk assets, although it will perform differently in different types of recessions.
A recent Bloomberg study projected that by 2025, the price of BTC would be around $100,000, but that is not a crazy price. Warren Buffett’s Berkshire Hathaway was priced at $297,000 in May. People are happy to pay large prices for things of durability,fungibility (the interchangeability of goods/ assets of the same type) and scarcity: diamonds, gold, Berkshire Hathaway and Bitcoin. It’s nothing to do with their inherent value but perceived value (diamonds are just compressed ash; bitcoin compressed code). Regardless of what price Bitcoin plateaus at, hopefully it will be stable enough to allow corporate investors to hedge against fiat devaluation and stock market volatility.
Most non-fiat productive assets are hedges against monetary inflation in the developed world, but it is unlikely to save us in a recession.
I’m really worried. The government is determined to stamp out poverty…and that is all I have left