Rising inflation, increasing prices of goods like oil and gas, and other global factors are causing an economic situation that many people fear could lead to a recession. This occurs when an economy’s gross domestic product - the total market value of the goods and services a country produces - goes into negative figures, combined with a rise in unemployment and declines in retail sales and manufacturing output. And periods of recession typically see investors seeking out assets they deem safe, like the dollar or gold.
Cryptocurrencies performed positively during the brief recession caused by the early days of the COVID-19 pandemic. Bitcoin hit a then-record high of over $28,000 as adoption surged and investors began to take the largest cryptocurrency seriously. But cryptocurrency performance is currently in flux, with experts unsure whether they are set to surge or suffer. For example, NPR’s business correspondent David Gura said: “Bitcoin hit a record of more than $69,000 in November of 2021. Today, it's trading around $23,000. And if you bought bitcoin the day after that ad bonanza during the Super Bowl, it is now worth about half of what you paid for it.”
This uncertainty raises questions about how ongoing economic issues and geopolitical situations could affect the value of cryptocurrencies if a global recession occurs.
Are we headed for a recession?
Recessions occur due to a wide range of factors, many of which are financial and are known as a natural recession. But issues as varied as extreme climate change, technical shortages, systemic economic collapse, and slow adoption of modern procedures can cause an artificial recession.
Significant driving forces of recession include:
Excessive debt: This is typically caused by nations borrowing too much money.
Asset bubbles: Growing demand for, and investment in assets that lack sustainable capitalization, which cause prices to fall dramatically and lead to panic selling when they burst.
Hyperinflation: Excessive inflation levels in nations where a vast proportion of the population live below the average income level.
Over-deflation: Excessive deflation leads to a rapid fall in goods and services prices and could lead to people and businesses stopping spending completely and a sharp production decline.
Technological advancement: New technology is typically considered a source of increased productivity. But the transition between revolutionary technologies can lead to less productive systems, which causes a sluggish economy.
Economic shock: Government actions like increasing tax rates, a rise in the price of high-demand goods like oil and gas, and higher tariffs can result in a regression. Other forms of economic shock include epidemics and natural disasters.
Any of the above factors can point to a looming economic crisis that could result in a recession. So the current high inflation, increasing tax rates, record levels of unemployment, surging gas, and energy prices, COVID-19 entering its epidemic phase, as well as multiple ongoing geopolitical situations offer numerous signs that a recession could be around the corner.
A recession can be predicted before it occurs, based on warning signs like the above factors. Financial experts can use data like the inverted yield curve, which points to short-term economic risks, to predict a potential recession. While declining consumer confidence, stock market declines, and a Leading Economic Index drop can also signify an economy is at risk.
How would cryptocurrencies respond to a recession?
If rising inflation and goods prices combined with broader economic and social issues cause a recession, the cryptocurrency market could struggle or see a surge in investment. The truth is that no one knows how the market will be affected or respond, but it will likely depend on the performance of the wider market.
However, cryptocurrencies are exceptionally volatile and risky assets, so they can be even more vulnerable to economic or political uncertainty than the stock market.
Crypto prices could drop
The crypto market is just as susceptible to the effects of economic crisis as the traditional financial market. As NextAdvisor states: “The crypto market has been closely correlated with the stock market since the start of the year, so if stocks fall because of the current conflicts in the world, cryptocurrencies most likely will too.”
In an economic crisis, investors are highly likely to try and offset their most high-risk investments. And cryptocurrencies are very much considered high risk, so they are likely to suffer in the event of a recession.
Investment retraction can lead to panic selling, which could in turn result in significant decreases in the price and value of crypto assets and markets. A recession could also affect human capital in the crypto market. As crypto adoption grows, it results in new projects that lead to new job opportunities. But as the market declines, the opposite occurs and jobs could be lost.
Some crypto organizations rely heavily on crypto-dominated reserves, in particular non-stable coins, which puts them at risk of being washed away by the knock-on effects of a recession. Companies will likely look to cut costs by making widespread job layoffs and pay decreases.
Investors could target risky assets
On the flip side, investors could see cryptocurrencies as worth the risk in the event of a recession. In July 2022, cryptocurrencies saw a strong performance, including Ethereum increasing by over 50% and Bitcoin going up 20%, according to NextAdvisor data.
That followed the crypto market crashing and bitcoin hitting a low of $17,500 just two months previously. While stocks and cryptocurrencies rallied when the Federal Reserve raised interest rates at the end of July. These figures suggest that the crypto market could rally during times of economic uncertainty.
Cryptocurrency options if a recession hits
Times of recession typically lead to investors, institutions, and more treading carefully, taking more care to operate proactively, and acting in more streamlined ways than under normal circumstances. Strategies in these situations can include:
Goal evaluation: Companies often respond to times of recession with practices that will strengthen their resilience and ability to stay afloat. This includes re-evaluating their business goals, setting strict priorities, assessing and reducing spending and running costs, and backing away from new investments.
Targeting debt-free firms: Individual investors may consider targeting companies with minimal debt, a good cash flow, and strong balance sheets. They will likely avoid investing in firms that are highly cyclical, leveraged, or speculative.
Figure out your finances
Whether a recession occurs due to various ongoing economic and geopolitical challenges remains to be seen. It’s also unclear exactly how cryptocurrencies would fare if a recession does materialize. But NPR’s David Gura advises: “True believers argue we're in what they call a crypto winter that will give rise to a crypto spring. More credible cryptocurrencies will survive, and the rest will disappear.”
With this in mind and considering the recent performance of Ethereum and Bitcoin, there are signs that major cryptocurrencies will thrive during times of economic uncertainty. But it’s crucial to be careful with any investment opportunities and only target markets you’re comfortable with. While prioritizing important financial options, like emergency funds, paying off high-interest debts, or paying a mortgage, should be addressed before crypto investments.
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