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Crypto during a recession: Here’s what to expect

Bitcoin balloon bursting
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Bitcoin, the largest cryptocurrency in the world, was created in 2009 during the depths of the great financial crisis. It took a while to gain traction, but it, along with other cryptocurrencies, has since exploded into a major market worth around $1 trillion.

But with the broad crypto market falling sharply from all-time highs reached in November 2021 as the Federal Reserve raises interest rates to combat high inflation, many investors are wondering how Bitcoin and other crypto assets might fare if the economy slides into a recession.

Here’s what crypto investors should expect, per the experts.

Crypto is no safe haven

As investors weigh the possibilities of a recession or a stagflationary environment, many are looking for assets to protect them from the potential storm. But experts say crypto isn’t the place to find it.

“I’m not sure crypto can be considered a safe haven given its volatility,” says Scott Sheridan, CEO of online brokerage firm tastyworks.

Popular cryptocurrencies such as Bitcoin and Ethereum have fallen nearly 70 percent from their all-time highs as investors shunned risk assets following the rise in interest rates.

Sheridan said he doesn’t envision a turnaround in crypto prices until volatility, as measured by the VIX, returns to more normal levels.

“Until then, 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,” he said.

So outperformance will be hard to come by for both equity and crypto investors until recent volatility levels subside.

No way to value cryptocurrencies

One of the major critiques of cryptocurrencies as investments is that they have no intrinsic value, because they don’t produce anything for their owners. Your return is entirely dependent upon selling it to someone else for a higher price. Legendary investors including Warren Buffett and Charlie Munger have strongly criticized the investment merits of Bitcoin and other cryptocurrencies for this reason.

“Crypto is an investment in nothing,” Munger told the Australian Financial Review in an interview in July. “I don’t want to buy a piece of nothing, even if somebody tells me they can’t make more of it.”

Even those with a more positive view of Bitcoin and crypto assets acknowledge that valuing the digital coins is difficult, if not impossible.

“There is no established way to value Bitcoin,” says Noelle Acheson, head of market insights at crypto lender Genesis Global Trading. “It’s narrative driven – narratives can turn on a dime.”

Still, Acheson said she’s very bullish on the long-term prospects for Bitcoin. She sees a growing number of use cases for it and views it as an investment in a new technology.

Crypto could get worse before it gets better

With the significant decline in crypto assets already, traders may be wondering if the worst is behind us. But analysts still see plenty of risks on the horizon.

“The price of Bitcoin is not related to economic fundamentals, but sentiment is,” Acheson says. “Risk sentiment is going to get a lot worse – the market isn’t pricing in how aggressive the Fed’s going to get.”

Recent months have tested investors’ faith in crypto as an investment. TerraUSD, a so-called stablecoin meant to trade at $1, collapsed to a few pennies, while crypto-lender Celsius Network filed for bankruptcy. Three Arrows Capital, a crypto hedge fund, was ordered to liquidate by a British Virgin Islands court in June.

“Institutional investors and major crypto exchanges are taking strain, and many are on the brink of collapse,” says Tammy Da Costa, an analyst at financial market site DailyFX. “Over the past two months, the collapse of Terra, Celsius, Three Arrows Capital and job cuts from several key players (including Coinbase) are making the resumption of a bullish move even more challenging.”

A recession’s not guaranteed

Though fears of a recession have been elevated and the U.S. economy has shrunk for two consecutive quarters, one definition of a recession, there’s no guarantee a recession will actually occur. The U.S. economy added 528,000 jobs in July, according to the Labor Department, and the unemployment rate fell to 3.5 percent.

“Currently, we do not believe that we are in a recession or a stagflation scenario at all,” says Dr. Martin Hiesboeck, head of blockchain and crypto research at digital money platform Uphold. “The situation is more like after WWII, when we had a few years of high inflation and slow growth before the world recovered from the shock of war.”

“Solid digital asset projects with real-economic utility will do well regardless of the macroeconomic environment,” he added.

David Duong, head of institutional research at Coinbase, said the crypto selloff and solvency issues of firms such as Celsius and Three Arrows are due to a mismatch between short-term borrowing and long-term, illiquid assets.

“That has purged a lot of the excess in crypto risk, and it’s possible that consequently we may have seen the worst for the asset class in this cycle,” Duong said.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

Written by
Brian Baker
Investing reporter
Bankrate reporter Brian Baker covers investing and retirement. He has previous experience as an industry analyst at an investment firm. Baker is passionate about helping people make sense of complicated financial topics so that they can plan for their financial futures.
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Senior investing and wealth management reporter