How Would A Global Recession Affect Bitcoin?

A Looming Financial Crisis?

The 2008 financial crisis caused worldwide economic damage. The British Government alone spent £850B bailing out banks and over 3.7M jobs were lost, an ordeal that cost the British economy as much as £7.4T.

In October 2008, shortly after the last global financial crisis, Satoshi Nakamoto released his whitepaper for “Bitcoin: A Peer-to-Peer Electronic Cash System”, outlining a decentralised network that operates beyond the confines of traditional financial institutions. Having emerged from the pits, Bitcoin and other cryptocurrencies are yet to experience an economic downturn.

Over the last few months, there has been a number of warning signs that appear to suggest another financial crisis is on the horizon:

• The U.S. vs China’s escalating trade war
• German productivity stuttering
• Brexit uncertainty
• The Chinese debt bomb
• Argentina, Iran, South Africa, Turkey and Venezuela struggling
• The U.S. yield curve inverting for the first time in 12 years

Having greatly disrupted the current financial landscape, the question of how Bitcoin will perform in a looming financial crisis has become increasingly important for many holders. This article explores the various factors behind the two potential courses of action.

The Bullish Option

Short-Term Safe Haven Investment

Safe havens are currencies and investments that people expect to retain or increase in value during times of economic instability. They tend to have a historic background as a reliable store of value and possess high liquidity.

Gold has been perceived as a safe-haven asset for hundreds of years and the central bank sector has acquired over 33,800 tonnes of the precious metal as a crisis prevention strategy and a hedge against risk. In fact, the last time the central banks bought as much bullion as they did last year, was when the U.S. ended the gold standard in 1971 (almost 50 years ago), which raises increasing questions about the current state of affairs.

Bitcoin has long been described as “digital gold” as it fulfils many of the same inherent properties; scarce, fungible and durable. Recent data from Bloomberg revealed on August 7th, found that the correlation between Bitcoin and gold has nearly doubled over the prior three months from 0.496 to 0.837 (with +1 indicating a perfect correlation); any correlation coefficient with a magnitude above 0.7 can be considered ‘highly correlated’. With gold consistently delivering during times of economic decline, data suggests that Bitcoin could follow suit during the next economic downturn.

Long-Term Escape from our Current Financial System

It may be that a global financial crisis highlights the flaws in our economic system and helps educate the general consumers on the alternative available options. On a peer-to-peer online forum in 2009, Satoshi Nakamoto wrote:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”

During a recession, central banks and governments frequently resort to cutting taxes and lowering interest rates in order to encourage spending and rejuvenate the economy. Unfortunately, many governments have been undergoing such policy changes before the crisis has even arrived, leaving only last-resort tactics such as quantitative easing; a technique that effectively increases the money supply and greatly weakens the purchasing power of your home currency.

According to a study of 775 fiat currencies, the average life expectancy for a fiat currency is just 27 years. The British pound Sterling is the oldest fiat currency in existence at 325 years old, making it incredibly successful in comparison to others, however, the British pound was also defined as 12 ounces of silver meaning it is now worth just 0.5% of its original value.

As Bitcoin is purely based on maths and inflation resistant due to its scarcity, another financial crisis may better educate the general consumers on the many flaws of fiat currencies, and some of the potential long-term benefits of Bitcoin. On the other hand, this is an idealistic view that largely assumes the general public are motivated for change and interested in economics.

The Bearish Option

Safe-Haven Theory Unconfirmed

Although the concept of Bitcoin as a safe-haven asset appeals to many, the cryptocurrency still experiences massive 10%+ swings that weaken its position as a stable alternative.

Gold has unique physical chemical characteristics that make it valuable and highly usable; it is malleable, ductile and corrosion-resistant. Bitcoin, however, does not possess the same intrinsic qualities and currently lacks use-cases. Further down the line when utility improves and prices stabilise the theory may hold up, but as of yet, there is no concrete evidence to suggest Bitcoin is a safe haven asset like the highly trustworthy precious metal.

Liquidating Assets

Cryptocurrencies are still considered extremely risky investments, and despite offering an entirely new financial system, the vast majority of holders are here to take profits. In a recession, these types of risky investments are often the first to suffer as people seek greater stability and more disposable income in their daily lives. Having experienced a strong rally this year, with gains of over 200%, holders may decide it’s time to cash out, instigating higher sell pressures and decreasing the price of Bitcoin.

Altcoins Are Not Bitcoin

Having said that, it is also worth noting that no altcoin has experienced as many crashes and recoveries as Bitcoin. Whilst the 82% fall over 2018 was Bitcoins most memorable bear market, the new digital currency has experienced far more severe crashes in the past including a massive 93% drop in 2011. Despite this, it has always recovered, which solidifies its position as the most stable and efficient store-of-value within the cryptocurrency market. It is likely most people would liquidate their altcoins before they consider selling their Bitcoin.

With many ICO’s that emerged from the 2017 boom underperforming, Bitcoins market dominance has edged higher over the last year to around 70% according to CoinMarketCap, and some research has suggested that the figure is actually closer to 90% when accounting for liquidity. A global recession could easily push Bitcoin’s dominance higher as people sell their far riskier altcoins.

Next Steps?

As Bitcoin emerged from the last financial crisis a very new and unheard-of technology, there is no track record to analyse regarding how a recession will impact its price. As the markets are predominantly determined by greed or fear, any investment vehicle that offers stable and moderate returns will likely be the go-to asset, whether this is Bitcoin, gold, USDs, bonds or something else is unknown.

Plutus

Plutus is a finance app that bridges the two monetary systems, achieving the best of both worlds. Users can manage their regular currency portfolio (GBP/EUR) in a current account and access their personal cryptocurrency wallet from the same app interface; an incredibly convenient feature for crypto enthusiasts looking to manage their entire portfolio in one place.

Consumers can also seamlessly trade between crypto and fiat using an incredibly secure decentralised exchange (PlutusDEX), this gives users the opportunity to rapidly convert funds if the markets turn sour.

The exchange also enables users to utilise their cryptocurrencies for spending. The app allows users to top-up a Plutus Debit Card with crypto, and the funds are effortlessly converted into spendable fiat usable at over 400 million merchants. The option to spend either fiat or crypto at any visa accepted payments terminal is a massive step for financial independence. As an added incentive, consumers receive 3% of every top-up back in the form of Pluton (PLU), a token with numerous benefits and exchangeable for local currency.