The outlook for digital assets as we enter a global recession

Bitcoin was born out of the 2008 financial crisis, but until COVID it had never actually been through one. It remains to be seen if peer-to-peer financial models will stand up to the test that they were designed to pass.

The Financial Crisis of 2008 exposed conventional financial infrastructure’s inherent shortcomings and, in its aftermath, Bitcoin emerged as a solution designed to avoid and directly address such systemic failures. While the debate around BTC’s core use cases rages on (Store of value vs. Medium of exchange vs. Unit of account), what pundits have come to a consensus on is its seminal value as a disintermediated currency model. With global economies awakening from their pandemic-induced hibernations and hope fading that a ‘V-shaped’ recovery will egress, time will soon tell if crypto will deliver on its promise and prevail against the backdrop of a global recession.

The Macro Take

The price of Bitcoin took a substantial tumble in March as COVID reverberated shocks through the markets and upended portfolios. BTC’s dramatic plunge, hitting below $5,000 (a drop of 45% which mirrored the chart of many equities), has somewhat discredited the store of value argument, however temporary the fall may have been.

In line with returning market optimism, which was closely linked to unprecedented stimulus commitments, BTC rapidly rebounded, resetting at a now-favored $9,250 level. What is less clear is whether BTC, which has been heralded as a hedge against currency devaluation as a result of quantitative easing (QE) due to its fixed supply cap, returned to strength as a reaction to watershed fiat printing, which undermined confidence in conventional monetary instruments, or if the market revivification that global stimulus packages precipitated drove BTC’s return to strength.

What is clear in any case is that the idea that BTC is somehow uncorrelated with mainstream finance has now convincingly been laid to rest. Some analysts and commentators have in fact argued that BTC’s correlation to the stock market has reached an all-time high1. Others have been quick to point out that fiscal injections tend to float all markets and so crypto should not be expected to fare any differently.
After initial rebound rallies, indicators are showing that economic contraction is expected to continue at a rate unseen in many nations in centuries2, and markets are showing signs of seizing up again. It remains to be seen if a dramatic market plunge would lead to another BTC sell-off, or if the expectation of further stimulus pumps will this time drive the inverse effect.

Positive Indicators

Thus far, BTC has held firm ground since its brief March-April plunge and the mid-May BTC “halving” event further supported momentum for a price rise, which enabled the coin to break higher resistance at the multi-year downtrend line. Also In May, VC giant Andreessen Horowitz published research indicating the crypto industry’s ‘choppy yet consistent growth’. He also made the argument for the emergence of a “fourth crypto cycle”3, mirroring the “slope of enlightenment” thesis put forth by Gartner4. Furthermore, a study commissioned by crypto think tank The Tokenist in April 2020 indicates that trust in bitcoin has grown substantially in the wake of the COVID-19 pandemic — up 29% over 2017 levels.5

On the Road to Real Recognition

While BTC was born out of the last recession and disenchantment with the monetary interventions that it spawned, this is arguably the first economic shock in which citizens and investors are no longer caged into a fragile and flawed monetary system. The digital asset class is increasingly being contemplated as a portfolio hedge to counter recurrent market volatility and inflation. This becomes even more prescient during periods in which markets are particularly exposed to politics in the form of crisis-related protectionism, stimulus policy interventions, and geopolitical hostilities.
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Footnotes

  1. CoinTelegraph 01 April 2020. Fed’s Quantitative Easing Strategy Holds Long-Term Benefits for Crypto. By Andrew Singer.
    https://cointelegraph.com/news/feds-quantitative-easing-strategy-holds-long-term-benefits-for-crypto
  2. BBC News. 7 May 2020. Bank of England warns of the sharpest recession on record. By Szu Ping Chan https://www.bbc.com/news/business-52566030
  3. The Crypto Price-Innovation Cycle, Andreessen Horowitz 2020, by Chris Dixon and Eddy Lazzarin. https://a16z.com/2020/05/15/the-crypto-price-innovation-cycle/
  4. BLOCKCHAIN.com. Aug 24, 2018. Blockchain Enters “Trough of Disillusionment” According to Gartner. By Samuel Haig. https://news.bitcoin.com/blockchain-enters-trough-disillusionment-gartner/
  5. The Tokenist. July 16, 2020 Comparing Public Bitcoin Adoption Rates in 2020 vs 2017 https://thetokenist.io/bitcoin-survey-2017-vs-2020/