Bitcoin, the largest cryptocurrency in the world, was born in the depths of the financial crisis in 2009. It took a while to gain traction, but it has since exploded into a massive market worth around $1 trillion along with other cryptocurrencies.
However, the broader crypto market has fallen sharply from its all-time highs set in November 2021 as the Federal Reserve raised interest rates to combat high inflation, leaving many investors wondering how the economy would fare if it shifted to bitcoin and other crypto assets. Recession declines.
Here’s what experts say crypto investors should expect.
Cryptocurrencies are not a safe haven
As investors weigh the possibility of a recession or a stagflationary environment, many are looking for assets that will protect them from potential storms. However, experts say encryption is not the place to find it.
“I’m not sure cryptocurrencies can be considered a safe haven given their volatility,” said Scott Sheridan, chief executive of online brokerage Deliciousworks.
Popular cryptocurrencies such as bitcoin and ethereum have fallen nearly 70% from their all-time highs as investors shunned risky assets after rising interest rates.
Sheridan said he doesn’t see a reversal in cryptocurrency prices until volatility, as measured by the VIX, returns to more normal levels.
“Until then, I think the underlying alpha in the stock market combined with the changing state and subsequent cryptocurrency turmoil is for speculation rather than storm protection,” he said.
As such, it will be difficult for both stock and crypto investors to outperform until recent volatility levels subside.
Unable to rate cryptocurrencies
One of the biggest criticisms of cryptocurrencies as investments is that they have no intrinsic value because they do not produce anything for their owners. Your return is entirely up to you selling it to someone else at a higher price. For this reason, legendary investors like Warren Buffett and Charlie Munger have harshly criticized the investment value of Bitcoin and other cryptocurrencies.
“Cryptocurrency is an investment,” Munger said in an interview with The Australian Financial Review in July. “I don’t want to buy anything even if someone tells me they can’t make more.”
Even those more positive about Bitcoin and cryptoassets recognize that valuing digital coins is difficult, if not impossible.
“There is no established way to value bitcoin,” said Noelle Acheson, director of market insights at cryptocurrency lender Genesis Global Trading. “It’s narrative-driven — narratives can shift in the blink of an eye.”
However, Acheson said she is very optimistic about Bitcoin’s long-term prospects. She sees more and more use cases and sees it as an investment in new technology.
Cryptocurrencies could get worse before they get better
With crypto assets already in sharp decline, traders may be wondering if the worst is over. But analysts still see many risks looming.
“Bitcoin’s price has nothing to do with economic fundamentals, but the sentiment is,” Acheson said. “Risk sentiment is going to deteriorate significantly – the market is not expecting how aggressive the Fed will be.”
The past few months have tested investor confidence in cryptocurrency investing. TerraUSD, a so-called stablecoin that trades at $1, plummeted to a few cents when cryptocurrency lender Celsius Network filed for bankruptcy. Cryptocurrency hedge fund Three Arrows Capital was ordered into liquidation by a British Virgin Islands court in June.
“Institutional investors and major cryptocurrency exchanges are under pressure, many on the verge of collapse,” said Tammy Da Costa, an analyst at financial markets website DailyFX. “Over the past two months, Terra, Celsius, Three Arrows Capital’s The collapse and layoffs of several major players, including Coinbase, make it harder to resume the upward movement.”
Recession is not guaranteed
While recession fears have risen, the U.S. economy has contracted for two consecutive quarters, a definition of a recession but no guarantee that it will actually materialize. The U.S. economy added 528,000 jobs in July and the unemployment rate fell to 3.5%, according to the Labor Department.
“Right now, we don’t believe we’re in a recession or stagflation at all,” said Dr. Martin Hiesböck, Head of Blockchain and Crypto Research at digital currency platform Uphold. “The situation is more like the post-World War II situation, where we experienced several years of high inflation and slow growth before the world recovered from the shock of the war.”
“A physical digital asset project with real economic benefits will do well regardless of the macroeconomic environment,” he added.
According to David Duong, head of institutional research at Coinbase, crypto sell-offs and solvency issues at companies like Celsius and Three Arrows are due to a mismatch between short-term borrowings and long-term illiquid assets.
“This removes most of the excess crypto risk and we have probably seen the worst of the asset class this cycle,” Duong said.