BITCOIN, the largest cryptocurrency by market capitalisation, was created in 2009 during the great financial crash.
Although it took a while for cryptocurrencies to gain traction it has since exploded into a major market worth around $1 trillion.
But as the market continues to fall from all-time highs reached in November 2021, after the Federal Reserve raised interest rates to combat high inflation, investors are now wondering how Bitcoin and other cryptocurrencies will fare if we go into a recession.
The cryptocurrency market hasn’t been around long enough for us to understand how it will behave in a recession.
However, there have been a number of periods of poor economic performance in the last 13 years which gives us an idea on how the cryptocurrency market might hold if a full-scale recession happens.
One of the few periods of economic instability since 2009 happened in 2015.
After 2014, GDP grew, although at slower rates each quarter and it eventually bottomed out at a 0.1 per cent growth in the fourth quarter of 2015.
The S&P 500 also posted its first negative year since the Great Recession in 2015.
At this time, the cryptocurrency market plummeted as the market capitalization of all cryptocurrencies fell by nearly 70 per cent.
Another period of economic uncertainty came in 2018.
In 2018 the S&P 500 posted its worst year since the Great Recession and lost 6 per cent of its value.
After peaking at $750 billion following the 2017 bull run, the cryptocurrency market cap plummeted and fell to as low as just $107 billion – a 85 per cent decline.
Bitcoin fell from around $19,000 to just above $3,000.
Crypto isn’t a safe investment
It’s clear that during periods of slowing economic growth cryptocurrencies are not spared and are often hit harder than other assets.
As investors weigh up the possibilities of a recession, many are looking for assets to protect them from the incoming storm.
But cryptocurrencies aren’t going to be a safe haven.
Bitcoin and Ethereum alone have fallen nearly 70 per cent from their all-time highs after investors sold off risk assets following the rise in interest rates.
Scott Sheridan, CEO of online brokerage firm Tastyworks, said: “I’m not sure crypto can be considered a safe haven given its volatility.”
He added: “I think the combination of potential alpha in equity markets and the evolving state and subsequent turbulence in crypto are more geared toward speculation than they are shelter from the storm.”
Investing at the bottom of cycles in 2015 and 2018 did, however, return phenomenal returns for investors.
If you invested $1,000 in Bitcoin when the market hit a low in mid-2015, that $1,000 would’ve been worth more than $80,000 by 2017.
If you bought the bottom of the 2018 crypto winter, that $1,0000 would have been worth nearly $20,000 if you had held on until Bitcoin hit a new all-time high in 2021.
Investors who are willing to take advantage of depressed prices could position themselves well for gains similar to periods like the bull runs in 2017 or 2021.
What is the value of cryptocurrencies?
One critique of cryptocurrencies as investments is they have no intrinsic value, because they don’t produce anything for their owners.
Your return is dependent on selling it to someone else for a higher price.
Noelle Acheson, head of market insights at crypto lender Genesis Global Trading said: “There is no established way to value Bitcoin.
“It’s narrative driven – narratives can turn on a dime.”
Cryptocurrencies could continue to fall
Investors are continuing to wonder if the worst is behind us.
Acheson says: “The price of Bitcoin is not related to economic fundamentals, but sentiment is.
“Risk sentiment is going to get a lot worse – the market isn’t pricing in how aggressive the Fed’s going to get.”
2022 has tested investors’ faith in cryptocurrency as an investment.
TerraUSD, a so-called stablecoin meant to trade at $1, collapsed to almost $0 in May 2022, while crypto-lender Celsius Network also filed for bankruptcy.
Tammy Da Costa, an analyst at financial market site DailyFX, said: “Institutional investors and major crypto exchanges are taking strain, and many are on the brink of collapse.
“Over the past few months, the collapse of Terra and Celsius and job cuts from several key players including Coinbase are making the resumption of a bullish move even more challenging.”
But Jeff Dorman, chief investment officer at the digital-asset manager Arca Funds said: “Whether or not we are in a recession is irrelevant [for the price of cryptocurrencies].
“Bitcoin is nothing more than a call option on a future where bitcoin is used as an actual currency in the face of declining confidence in fiat.
”As a result, Bitcoin’s price is simply a reflection of whether or not that probability increases or decreases, and from that standpoint, a recession could in theory increase the probability of investors looking for an alternative to government fiat.”
