The accompanying slowdown in growth and fall in spending power result in worrying times for many individuals. It can certainly make investors evaluate a crypto portfolio, which, in 2022, may include Bitcoin. Bitcoin was originally launched in 2009, in the midst of the last full-blown recession. Since then, the worlds leading cryptocurrency has not yet had to face a comparable economic environment. Which begs the question, what could happen to Bitcoin in a recession-scale event? This is what we hope to uncover in this article.
Before evaluating the impacts of a recession on Bitcoin, let’s take a look at the exact definition of a recession. The majority of economists worldwide quote a definition that was first described in 1974. The description, created by Julius Shiskin, states that a country moves into a recession after the gross domestic product (GDP) declines for two consecutive quarters. Healthy economies expand with time, whereas an economy that has been shrinking for 6 months likely has some significant underlying issues.
The National Bureau of Economic Research (NBER) in the US offers a similar definition but is not tied to two consecutive quarters of economic shrinking. Alongside negative GDP growth, there are several other layers that make up a recessionary environment. These layers include increasing levels of unemployment, lower disposable income, a slow down in retail sales, and decreasing levels of manufacturing. Recessionary periods are uncomfortable for most. The effects outlined above highlight why these periods can have significant impacts on all investable asset classes, particularly for risk-on asset classes such as crypto.
It is impossible to say if Bitcoin will survive a recession - as Bitcoin has never faced a recession in the past. However, there are certain facts that we can use to infer its potential stability during such a period. Firstly, the pseudonymous Satoshi Nakamoto created Bitcoin as a result of the last global recession. It was the cataclysmic failure of the global economic system that prompted Nakamoto to make the blockchain and accompanying cryptocurrency that we know today. It was created to be independent and not reliant on any centralized third-party government or organization.
The global economy has become increasingly interconnected. In the past, if one economy failed it may not have significantly affected other countries. However, in today’s environment, a threat to the economy of one country can become a threat to all. While Bitcoin’s self-reliance is what makes the asset a riskier investment, it is also why it is likely to continue operating regardless of how the macroeconomic environment changes.
Also working in Bitcoin’s favor is its capped supply and steady flow rate. Only 21 million Bitcoins will ever be created, with just under 2 million Bitcoins left to mine. Once all coins have been mined, no more will enter the circulating supply. This has allowed Bitcoin to position itself as a ‘store of value’. In inflationary markets that often accompany recessions, global currencies can lose value which leads to less spending power. Even through bear markets, Bitcoin has provided an answer to this spending power problem and has continued to outperform other inflation hedging assets, such as gold.
Accompanying the capped supply is Bitcoin’s steady flow rate. The number of newly mined Bitcoin entering circulation occurs at a consistent and dependable rate. It is even shrinking with time as a result of Bitcoin halving events. While other commodities may suffer from oversupply, the Bitcoin consensus algorithm ensures that new coins are released in a consistent manner, which helps to avoid oversupply and a potential crash in price. A capped supply and steady flow rate mean that, as popularity increases, the future price of Bitcoin should only move in one direction.
Although the above points are encouraging, in a recession Bitcoin’s price will almost certainly be affected. The coin remains one of the riskest assets available within the market. Bitcoin’s price volatility and decentralized nature are why it is firmly placed in the ‘risk-on’ asset class. As a result, the price of Bitcoin will ebb and flow with the risk appetite of investors. At times of economic hardship, investors may rather hold more cash, than place capital into riskier assets such as Bitcoin.
The decentralized nature of Bitcoin could make it the perfect asset in a recession. However, emphasis needs to be placed on the word ‘could’. Since its launch in 2009, Bitcoin has arguably solidified itself within the current economic environment. The coin has reached institutional status with several hedge funds holding BTC within a portfolio, many high-end brokers now offering BTC investment options to clients, and several international organizations accumulating BTC on balance sheets.
The introduction of companies and institutions into the crypto space has formed an increasing correlation between technology stocks and Bitcoin. Tech stocks, which are represented by the Nasdaq 100 basket, have been closely following Bitcoin’s price action since the start of the Covid-19 pandemic in March 2020 (as shown below). Unfortunately, history shows that at times of recession, stocks tend to fall in value. If the two markets remain correlated, Bitcoin could fall if the stock market crashes. Investors should be aware that, in a recession, the price of BTC is unlikely to rebound until the strength of the global economy returns. Once that happens, history has shown that BTC has the potential to outpace the returns offered by nearly every other asset class.
Another important difference to remember is that while individual organizations may suffer in a recession - even fold in some cases - Bitcoin can continue to operate thanks to its decentralized network of mining pools. Bitcoin investors can, therefore, take some comfort in the fact that a downturn in economic growth is unlikely to impact the operations of the network. Bitcoin will continue to exist.
Although the price of Bitcoin is quoted in USD the relationship between these two assets runs a little deeper. History shows that Bitcoin and USD have had both a negative and positive correlation in the past. However, negative correlations are much more frequent. Typically, when the strength of the USD weakens, the strength of Bitcoin increases. Likewise, when the strength of the USD increases, the strength of Bitcoin weakens.
Between March 2020 and April 2021, the USD dollar index (DXY), fell from $102 to $89. Over the same period, Bitcoin's price increased from $6500 to $64,000. A similar relationship was also witnessed during Bitcoin’s bull cycle in 2017. While a negative correlation is more common and arguably healthier for BTC, there are also times when USD and Bitcoin display a positive correlation. These times are often followed by periods of significant bearish correction and volatility for Bitcoin.
From June 2021 to November 2021, the USD and Bitcoin moved in a positive correlation. Both USD and Bitcoin were increasing in strength. Since November 2021, the DXY has continued to push higher while Bitcoin has fallen over 75% from all-time highs. This relationship between USD and Bitcoin is an important one, particularly during recessions, when cash is often touted as ‘King’. If the demand for cash is high, which would drive the strength of the USD, Bitcoin is likely to suffer in the medium to long term.
Importantly, where these two assets diverge is the effects from inflation. The amount of USD in circulation has exponentially increased since the Covid-19 pandemic. Over 80% of all USD in existence was printed since January 2020. This has devalued all USD in circulation and increased the price of goods and services for all. However, with a limited supply of 21 million, Bitcoin does not suffer from the same problem.
A market crash is defined as a time when the price of an asset rapidly declines, usually by more than 10%. However, that definition is not that applicable to crypto assets, as the average crypto asset can swing by more than 10% in a day. Therefore, for the purposes of this article, we will define a crypto crash as a rapid decline in price by more than 30%.
With those parameters, the price of Bitcoin has crashed several times in the past 13 years. Like most assets, as Bitcoin has entered price discovery mode and has recorded a new all-time high, the price eventually needs to cool off which leads to a correction. Let’s look at a few examples.
In 2013, Bitcoin prices retraced 80% from an all-time high of $1000. In 2017, Bitcoin prices retraced 84% from an all-time high of $20,000. In 2020, Bitcoin prices crashed 63% as a result of the Covid-19 pandemic. In 2021, Bitcoin prices began to retrace from an all-time high of $69,000. At the time of writing, the bottom of that bear market has not been clearly established.
Using the examples above, it is clear to see that Bitcoin is not immune to crashes. Just like stocks, crashes have become part of the crypto cycle and many in the industry believe that each crash is necessary to remove inefficient projects and leave room for successful innovations to grow.
When the price of any asset falls, it is due to an imbalance between buyers and sellers. In a crash, the number of sellers greatly outnumbers the number of buyers. There are several reasons that can lead to this imbalance for Bitcoin.
- Speculative bubble. One of the most common reasons why Bitcoin crashes is due to intense levels of speculative investing. As popularity increases and investors enter the market due to the fear of missing out (FOMO), Bitcoin prices can climb dramatically. However, at a certain unknown point, some investors will begin to sell coins to lock in profits. If enough investors start to do this prices can fall extremely quickly.
- Spiraling liquidations. Alongside long-term Bitcoin investors, there are also a number of speculative traders that try to earn profits from shorter-term market movements. This may involve using broker-provided products such as leverage. A fall in market prices will hurt investors that have bet on the price of Bitcoin to keep increasing. When using leverage, if a maintenance margin cannot be upheld, positions will be liquidated, driving the price of Bitcoin even lower. If important levels of market structure are broken, this can result in a cascading effect until an increasing number of buyers begin to level out the price.
- Black swan events. Black swan events are defined as something that is completely unpredictable. The latest example of a black swan event was the Covid-19 pandemic. As a result of the Covid-19 pandemic, Bitcoin crashed by over 60% as investors sold positions and de-risked portfolios. Other black swan events include wars or natural disasters.
- Economics. Although economics has not played as big of a role in other Bitcoin crashes, the burst of the speculative bubble from 2021-2022 is highly correlated with the breakdown of the economic climate. Rising inflation is often combatted with high-interest rates, which can result in investors selling assets to either hold cash or cover debts. Coupled with a speculative bubble, this scenario has resulted in prices falling by over 75%. The threat of recession can also cause uncertainty, which all markets hate. If investors are unsure as to the direction of the market, selling pressure can dramatically outweigh buying pressure.
- Regulatory changes. A change to regulations can cause dramatic ripples in the price of Bitcoin. Although changes to the regulations of one country are not likely enough to cause a crash, regulatory changes in the past have coincided with other news which has fueled fear, doubt, and uncertainty.
Bitcoin has survived several market crashes before. So, it is likely that Bitcoin will also survive future crashes. Unfortunately, no one can predict when a crash will end. Changes in the economic climate burst the speculative bubble that had been growing for much of 2021. As central banks worldwide began to raise interest rates and cease quantitative easing, all risk-on assets suffered. Until the economic climate changes, Bitcoin prices may remain relatively subdued.
Importantly, it is not the fundamentals of Bitcoin that caused the crash. The technology behind the world’s leading blockchain still works and the number of users opening Bitcoin wallets continues to rise and invest in Bitcoin.
According to data collected by Glassnode, the total number of Bitcoin wallet addresses is approaching 1 billion. Although that would nearly account for an eighth of the global population, the number of Bitcoin owners stands far lower at approximately 106 million, as most cryptocurrency investors own multiple Bitcoin wallet addresses. Moreover, thanks to Active Address data from Glassnode, we can see that of 106 million owners, the number of wallets using Bitcoin on a monthly basis has not been higher than 22 million.
The figures above demonstrate that Bitcoin still has considerable room to grow in the global population. Even with the current user base, Bitcoin will likely return to all-time highs. But lower prices could bring a new wave of user adoption.
Although near-impossible, Bitcoin could technically reach zero. However, Bitcoin would need to become completely redundant for it to crash to zero. This could happen in one of two ways.
The first scenario would involve Bitcoin becoming unusable to purchase goods and services. One of the only plausible scenarios for this would be if the coin was banned by governments worldwide. The coin would be no longer accessible via exchanges and all Bitcoin miners would need to be shut down. Even in such a scenario, the likelihood is that some Bitcoin mining rigs would survive.
The second scenario involves Bitcoin being replaced by a superior cryptocurrency. If this occurred, Bitcoin could become obsolete. If there is no longer a market for Bitcoin, its price could return to zero. However, currently, there is no competitor to Bitcoin. If one appears, it would likely take a long time for Bitcoin to lose its dominance in the market.
It is impossible to know if Bitcoin will fall further. Historically, bear market retracements have ranged from 60% to 85%. At the time of writing, the 2021-2022 bear market has retraced 70% from all-time highs. The retracement, therefore, sits within the historic range. If the global economic environment improves and stock markets begin to recover, Bitcoin may begin to stabilize and climb. However, if the global economic environment continues to deteriorate, Bitcoin could fall further.
Bitcoin is still the dominant cryptocurrency within the market. At the time of writing, Bitcoin’s market capitalization accounts for over 40% of the total cryptocurrency market. Due to its dominance, when Bitcoin crashes, all other cryptos in the market such as Ethereum, XRP and Solana tend to fall with it.
A recession is knocking on the door of the global economy. At times like these, it is important for investors to evaluate portfolios and re-allocate if necessary. This may involve asking the question, what will happen to Bitcoin?
Although Bitcoin has not yet faced a recession, there are elements of the blockchain and coin that would suggest it has the capability to survive. Bitcoin was born out of the previous global recession. Its purpose was to freely interact with the economy without being constrained by third-party organizations or governments. It also remains one of the most decentralized networks in the industry, and its capped supply has seen the coin become a hedge against the ongoing devaluing of fiat currencies.
Bitcoin’s tie to stocks, particularly tech, means that in a recession when global spending power is low, the price of the asset will likely suffer alongside equity markets. However, importantly, Bitcoin’s fundamentals will remain unchanged.