Cryptocurrencies in the next economic crisis: effects, evolution, risks

The launch of the Bitcoin ETF: market influence
January 14, 2019
Cryptocurrencies in the next economic crisis

Most financial analysts say the next economic crisis is knocking at the door. This is somewhat understandable, since we have been in a bull market for the last 10 years. Economic cycles generally take from 7 to 11 years, so it’s normal for people to be preparing for the next recession. But not many people ask how the latest emerging assets, cryptocurrencies, will be in the next economic crisis.

It is not certain that the recession will cause an economic incident as severe as the 2007-2009 subprime mortgage crisis. But, throughout the history, it was clearly proved that it’s better to sell your investment assets before a plunge, in order to maximise profits. 

Now, probably many of you reading this blog have invested at some point in cryptocurrency. The question is: how will they be affected by the next economic crisis?

I identified 2 possible scenarios, which depend on many external factors: bull and bear market.

The bull market

Cryptocurrency origins

Let’s go back to the origins of the first cryptocurrency, Bitcoin. A person using the pseudonym Satoshi Nakamoto published online, on 31 October 2008, the white paper explaining Bitcoin’s mechanism. A short time after, in early January 2009, he started the bitcoin network by mining the first block (genesis block), which contained the following text:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.  

Satoshi Nakamoto, 3 January 2009

This clearly shows the inventor’s attitude towards the current financial system, based on fractional-reserve banking, and the instability caused by it in the late 2000s. 

So, that is why he invented Bitcoin. It offers an alternative for the current international banking system. It was also a matter of innovation. He solved several problems, in order to reduce fraud to a minimum and make the system as transparent as possible. 

Now, we can assume that Satoshi made this system in order to prevent economic disasters like 2008. This is what could bring investors’ confidence during stock market crashes. People often compare gold with Bitcoin (“digital gold”). Therefore, it can become the new refuge for capital (instead of precious metals). 

The system

Its nature is similar to gold. Over time, inflation decreases exponentially (until the last bitcoin is mined), after which no more currency is created.

Many people might argue saying it is a currency, so looking at others (like USD, EUR, CHF), they might assume that the crisis effect will not be as severe. Keep in mind though that physical currencies are backed up by gold. Deposits in your bank account are the bank’s promise to pay currency. Currency is the government’s promise to pay gold. This is what gives value to them. Bitcoin, on the other hand, has no gold as backup and has a history of huge volatility. 

You can view this either optimistically, or as a pessimist. Optimists can say that the backup of cryptocurrencies is their anti-fraud and transparent system, and that is what can give confidence to the general population.

The bear market

Cryptocurrencies have been very volatile and weakly linked to their use case until now. We have never seen how they perform during an economic crisis. It is very hard to make assumptions, but this is also a possible scenario.

As I said, they are also currencies. But different from the traditional ones, which are a gold bond (in easy words). This can result in a lack of confidence from investors, that would lead to an even more severe plunge.

Conclusion

As of writing this article (January 2019), the market has been on a decline trend, after it saw a slight increase in the holiday season. The decrease can stop anytime, as investors will start taking capital out of the stock market soon, in order to protect themselves from what is coming.

We are not sure what will happen with cryptocurrencies in the next economic crisis. Considering we are the technology’s embracers, we will still strongly believe in this system, created during one of the hardest economic periods of the last century. So this problem has a very simple solution: keep investing and holding, if you believe in the technology; sell, if you are skeptical about it. But keep in mind that you don’t lose until you sell.

If you have any questions, or wish to have a chat with me, don’t hesitate to use this link

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