With the global economy slowing down and markets across the world looking like they have topped out, a recurring discussion in the cryptocurrency community revolves around investing in Bitcoin as a bet against the current financial system.
This year has started out strong with the Bitcoin price increasing almost four times from its January 2019 bottom, till the peak of the current cycle. The biggest problem with the economy today is the unwillingness of central bankers to let the economic cycle play out. As a result, central banks across the world look at monetary policy (interest rates and inflation) as a means of manipulating the economy into action.
Bitcoin is inherently protected against the monetary policy of governments as it has its own inflation and issuance schedules. Its ability to withstand high inflation and interest rate manipulation has led many to believe it can be used as a hedge against recessions.
However, there is one giant hole in this theory: Bitcoin has never existed during a recession. Satoshi Nakamoto created Bitcoin in 2009, and it only started to gain traction in 2011. The last proper global recession ended in late 2008.
Since there are no solid data points, everything regarding Bitcoin and recessions is, at this point, simply speculation. But this alone doesn’t erode the soundness of the various thesis regarding Bitcoin. Let’s explore the arguments for Bitcoin as a recessionary hedge.
During a recession, the value of the USD tends to decline. A weaker dollar, by relativity, implies a stronger Bitcoin price. Research from Grayscale Investments shows that the correlation between Bitcoin and traditional assets like stocks, bonds, currencies, and commodities is incredibly weak. This means Bitcoin can statistically work as a hedge against most traditional assets.
To add fuel to the fire, Bitcoin has a block reward halving in less than a year. The global economy is already showing signs of structural weakness, and a recession may coincide with the halving in May 2020. Halvings are significant events because they reduce the issuance schedule of Bitcoin. With lower issuance comes lower inflation, and this ultimately leads to lower supply in the market.
StrixLeviathan research has shown that Bitcoin has natural market demand, so in the aftermath of a halving, Bitcoin price tends to skyrocket due to the reduction in supply relative to increasing demand.
While this point does not prove that Bitcoin will perform well during a recession, it does indicate that the fundamentals are strong, and Bitcoin is only at the start of a new bullish cycle.
Despite the strong arguments, this is all merely speculation. The fact of the matter is that there is no data on how Bitcoin will perform during a recession, so no concrete conclusions can be reached.
Even gold, which is touted as the best investment to hedge against a recession, tends to lose value during a recession. This is because people buy gold and prop up the price in expectation of a recession, and sell their gold for liquidity during a crisis.
In short, there is a high probability Bitcoin will do well during a recession as more people move their wealth into an asset that cannot be eroded by government policies. However, there is also the possibility that a lot of people will start selling their Bitcoin to fund their expenses during the crisis.