Should a Recession Come, What Will Happen to the Crypto Market?

While the first whitepaper was created for Bitcoin in 2009, thirteen years later, the digital currency landscape is still in its teething phase. As of today, it runs side by side with traditional currency, meaning (although it is a separate entity) it is still affected by stock market flows and global economic movements when they arise. 

This is exemplified through the price movements that cryptocurrency has experienced itself. As a volatile market, coins can rise or fall based on both internal and external factors, with the most recent being the outbreak of the Ukrainian war. Just as the global financial market was made volatile by the war, so too was the volatile cryptocurrency market exasperated. In many ways, the crypto winter that is being felt right now can be linked predominantly to external financial factors, including rising inflation, which has been felt worldwide in 2022.

Just How Badly Will Crypto Be Affected By A Recession?

Contrary to some investor sentiments, it is undeniable that the cryptocurrency market would be affected by a recession. As mentioned previously, just because cryptocurrency is a separate market which exists solely on the blockchain, it is very much tied to the realities of global events, meaning a recession would hit the blockchain just as hard as it would hit traditional financial markets. 

It could even be said (although no investor would like to hear it) that a recession would hit crypto even harder than any other currency. With risk assets being panic-sold (as well as the crypto markets being volatile in nature), prices could drop drastically, and this can be proved simply by looking at previous traditional-to-digital price moments. 

Past Cryptocurrency Movements

While the first cryptocurrency was invented in 2009, the first period of economic instability took place in 2015, when the S&P 500 posted its first negative year since the Great Recession in 2008. This resulted in a bottom rate growth of 0.1% in the fourth quarter of 2015, which left the crypto asset class plummeting by nearly 70%. 

As well as this, in 2018, the S&P 500 lost 6% in value, which led cryptocurrency to fall from a peak of $750 billion to $107 billion (which amounts to a substantial 85% decline). During this year, the price of Bitcoin went from a high of $19,000 to $3000, bringing on its first crypto winter, which lasted for two years. Although it is still early days for cryptocurrencies (in many ways, the market has not been around long enough to get a complete idea of how it behaves), these historic economic issues can demonstrate just how hard a recession could hit the crypto market.  

But There Might Not Be A Recession, Right?

Of course, no one knows if a recession is actually going to happen. Looking at the US, although the economy has shrunk for two consecutive quarters, the government has also brought about 528,000 jobs in July 2022, meaning the unemployment rate has fallen to 3.5%. 

According to Dr Hiesboeck, who is head of blockchain and crypto research for Uphold, the global situation is acting similarly to the market back in the 1940s. After WWII, there were a few hard years of high inflation and slow growth, and it took a few more before the world recovered from the shock of the war. In this way (just as the second crypto winter is expected to last a few years), this could just be a time of poor growth before prices start to rise again.

The Silver Lining

As well as this, if there is indeed a recession, it could actually provide more opportunities for would-be investors. Anyone who invested in cryptocurrency back in 2015 or 2018 would have seen significant returns. Buying BTC in 2015 for $1000 would have seen a $79,000 return just two years later. Similarly, investing $1000 into BTC in 2018 would have seen a $19,000 return when it hit its high of $69,000 in 2021. 

Take Ethereum, for instance. Although ETH’s value is relatively low right now (with a high chance of it dropping lower should a recession occur), an investment could be extremely lucrative given the recent merge. Even with a recession, it is still expected that the price of Ethereum will soar around 2030, with the potential to even overtake Bitcoin as the leading digital asset in the market. In this way, although a recession would spell short-term difficulties for cryptocurrency, there is always a silver lining to be found. It is up to investors to stand firm and take their opportunities when they arise.