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Are We in a Recession? What Does it Mean for Crypto?

By Evan Jones08/14/2023

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It’s likely you’re experiencing tightened budgets in your everyday life. Groceries are more expensive than ever, things like buying gas are becoming a burden, and the interest rates on loans and mortgages aren’t exactly attractive.

Not only that, but it’s likely that your local currency, assuming you’re not in the US (and even a little bit if you are), has less foreign exchange power, and less purchasing power in general.

Yet, no one has truly declared we’re in a recession. It seems like we are though, even if no governmental power is willing to admit it yet. But what does that mean for crypto and how did we get here? Let’s jump in.

What’s Led to the Current Global Economy

Losing the Gold Standard

The Bretton Woods system was the last time countries issued currencies that were backed by an asset. It was the gold standard. For about 30 years, anyone could redeem $35 USD for an ounce of gold, ending in 1971 amid the Vietnam War. 

The reason for this departure was simple. The US spent more money than it had. They lost their depositors assets to increasing debt. But instead of going bankrupt, they leveraged the power of the US military and international demand for the US dollar to keep it in circulation. They’re also the nation that has experienced the most benefit from the end of the Bretton Woods system. It was a unilateral move by Richard Nixon with zero input from other nations.

2008 Mortgage Crisis and 2020 Pandemic

Continuing their historical money printing, the US doubled the amount of dollars circulating from 2019 – 2022, and overall the amount of USD circulating is about 10 times the amount there was pre-2008. 

Central banks argue that they can continue to leverage the power and influence of the government to keep inflation at a minimum. But it appears that inflation is now catching up to the exponential increase in monetary supply.    

To reign in inflation, the US Federal Reserve and other national financial bodies increase interest rates. Since the US Dollar is the main world currency, and is used by governments and all sorts of other parties globally, their increase in interest affects everyone.

However, because all these parties are facing their own local inflation issues, the problem compounds. They all need USD in order to pay back debts, pay for goods, services, and more. So, they swap their local currency for USD, which weakens the former and strengthens the latter. This cycle happens continuously. 

The USD getting stronger may seem like a good thing, but it’s only with respect to other currencies. With respect to goods, services, and commodities, even the USD is undergoing its own inflationary event and depreciating precipitously. 

In a time of globally high inflation, this drains the savings of people and countries as they struggle with a weakening local currency and increasing costs that are in USD. Instability and uncertainty for nations globally  is being felt and leads to the potentiality of a global recession which may already be taking shape.

What a Recession Means for Crypto

Crypto’s Fundamentals

Better monetary policy (such as not printing money every time there’s a problem) would be a good step towards avoiding a (worse?) recession, if we’re not already in one. However, we’ve already reached a point where fiat money printing is causing issues that will be difficult to fix in the long term.

As mentioned earlier, during the 2008 financial crisis, the US federal budget ballooned to about $2 trillion. During the pandemic it reached over $10 trillion, meaning that they’d printed 5 times the money that was in the system in that short period of 15 years. They’ve got it down about a trillion as of this year, meaning the balance sheet is now at a little over $8.5 trillion. Combine that with the US national debt and we may have a problem sooner than later. 

Bitcoin and most crypto assets work in stark contrast to fiat money. Most have a known and fixed maximum supply, meaning they’re deflationary over time. They’ve long been thought to be good hedges against inflation, but this has yet to be proven fully true, as the crypto market is so new and still has a lot of adoption that needs to take place before its true potential can be unlocked.

Risky Asset Class

The reality is that Bitcoin and cryptocurrencies are considered a risky asset class to invest in. Even though their fundamental bases are extremely strong and should lend themselves to creating better monetary policy, they’re still new and risky. In a recession, people are wary of investing in risky assets, even if they’re ostensibly hedges against poor monetary policy. 

This is because there’s always the chance that adoption of Bitcoin and digital assets stalls out or takes decades to truly take shape. People can’t afford to invest money they might lose, and so for the most part crypto is likely to be a bit stagnant in a recession. There’s also the chance it goes down.

That’s not to say you should avoid investing in Bitcoin or other digital assets if we are in a recession. It really depends on your personal due diligence and expectations for the market. Just like there’s the potential for Bitcoin and crypto adoption to stall out, there’s the same potential for it to explode. Only risk what you can afford to lose and you’ll sleep well.

Article tags

Beginner
cryptocurrency
investing
trading
Evan Jones

Author

Evan entered the crypto scene in 2017, attracted to the many disruptive possibilities that blockchain could have on current world systems. He has a keen interest in decentralized services, payment processing, and viable NFT use cases such as event ticketing. He spends his days writing with his dog Kobe under his feet, if not on his lap.

Further reading

Is the Bottom in for Bitcoin? image
Is the Bottom in for Bitcoin?06/12/2023
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