During a recession, the crypto market's behavior is uncertain due to its lack of historical precedent in prolonged economic downturns. Bitcoin, better known as digital gold, is often seen as a hedge against economic instability. It may experience both increased interest and significant sell-offs due to its liquidity and speculative nature. The performance of altcoins will likely depend on the recession's cause and duration. Investing in the crypto market during a recession is often considered with extreme prejudice, due to its inherent volatility. However, researching the dynamics of how crypto can perform during economic downturns reveals that it may not be a negative event. Better yet, investing in the crypto market during a recession can be strategically beneficial, but very uncomfortable to do.
Market Reactions
The crypto market has shown varied reactions to economic downturns. During the 2020 COVID pandemic, both traditional markets and crypto experienced deep declines. However, as governments implemented quantitative easing (QE) policies, Bitcoin and other cryptocurrencies saw massive rallies. This pattern suggests that while initial reactions to economic uncertainty may be negative, the long-term outlook can be positive if monetary policies favor liquidity.
So, what are these policies that favor liquidity? Policies used to address banking stability, inflation, and currency devaluation normally result in an increase to the money supply, which is good for risk assets. Banking crises can accelerate the trend of cryptocurrencies emerging as alternatives to traditional finance. Moreover, inflationary pressures and lowering interest rates associated with recessions can drive investors towards Bitcoin and other cryptocurrencies as protection against currency devaluation.
Currently, the sentiment on inflation and currency devaluation is a cause for concern. While inflation rates have been slowly declining from their peaks in many countries, they still remain high compared to historical averages. This has led to persistent worries about the erosion of purchasing power and the broader economic outlook. Central banks worldwide have been aggressively raising interest rates to combat inflation, which has raised concerns about potential economic slowdowns or even recessions. However, there's also a growing belief that inflation may be gradually returning to acceptable levels, leading to easing of monetary policy in the future. Yet the fear of weakening currencies is prevalent, especially in countries experiencing high inflation rates. Factors such as geopolitical events (Isreal/Ukraine), trade imbalances (U.S./China), and investor sentiment (Japanese Yen exchange rate) also play significant roles in currency fluctuations. Anything sound familiar yet.
Recession Resistant
Tokens with genuine utility and working products are more likely to maintain demand and value during economic downturns. Crypto projects that solve real-world problems and address specific needs are more resilient. As the market matures, speculation is likely to decrease, and tokens without practical use cases may struggle to survive. Token utility is the true value of the crypto ecosystem. Without it, we are merely guessing prices. Coins like the below are highlighted for their potential long-term value, due to their utility in areas such as app development, cross-blockchain compatibility, decentralized web platforms, and supply chain management.
