The potential for a US recession looms over crypto markets, with cash flow and real-world utility critical to weather the storm. Predictive models from the New York Federal Reserve point to a 68% likelihood of a recession hitting within the next year, a daunting 30% leap from predictions just five months earlier. Outside of the two-month recession around the Covid pandemic, crypto has never experienced any economic downturn. The mortgage-fueled “Great Recession” from 2007 to 2009 preceded Satoshi Nakomoto launching the Bitcoin network, long before NFTs and Web3.
The cryptocurrency industry’s reaction would largely depend on the root cause, duration, and severity, according to Rich Rosenblum, CEO of market maker GSR. Rosenblum suggests that if the recession is driven by a worsening of the banking crisis, it could end up a boon, with crypto increasingly being seen as a viable alternative to legacy financial systems. However, projects would need to focus more on public sales over private deals, as institutional demand may dry up.
On the other hand, if a recession stems from persistent global economic weakness, survival could be challenging for crypto companies, especially those dependent on speculative inflows. Tokens with real-world impact outside the industry are likely to be more resilient.
The good news is that the average length of a recession has declined over the centuries. However, some allocators, like Akshat Vaidya, head of investments at Maelstrom, aren’t confident that crypto could make it through unscathed. Vaidya expects crypto to move just like it did during the 2020 Covid crash, as liquidity vanishes in a cascade of margin calls.
Substantial monetary stimulus worldwide during the pandemic renewed one of Bitcoin’s primary value propositions: hedging against inflation and currency devaluation. With this in mind, one optimistic take is that Bitcoin, which generally leads crypto markets, has historically operated in four-year cycles, on account of its halvings. Past performance around halvings may not strictly indicate future results, but predictable changes to Bitcoin’s issuance could help crypto investors plan to weather the storm.
On the flip side, government stimulus has shielded parts of more traditional industries. While stimulus has made the business environment seem more stable, it’s not clear whether the broader economy could withstand dramatic shocks without intervention.
For startups battling a prolonged recession, profit margins and cash flow remain critical, according to Terrence Yang, director at bitcoin financial services firm Swan Bitcoin. Yang advises evaluating whether your company is solving a big, urgent problem with a uniquely valuable solution. For investors, Yang believes Bitcoin’s fundamentals in the long-term remain unchanged, especially over horizons longer than five years.
Source: Blockworks
