The US could be headed towards a recession, a potentially unprecedented test for the crypto industry.
Outside of the two-month recession around the Covid pandemic, crypto has never experienced any legitimate economic downturn. The mortgage-fueled “Great Recession” from 2007 to 2009 preceded Satoshi Nakomoto launching the Bitcoin network, long before NFTs and Web3.
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.
The cryptocurrency industry’s reaction would largely depend on the root cause, duration and severity, according to Rich Rosenblum, CEO of market maker GSR.
“If it’s a recession driven by a worsening of the banking crisis, it could end up a boon, as crypto is increasingly being seen as a viable alternative to legacy financial systems,” he said. Rosenblum warned that projects would need to focus more on public sales over private deals, as institutional demand may dry up.
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 of the industry are likely to be more resilient, Rosenblum said.
Recessions are getting shorter
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The good news: The average length of a recession has declined over the centuries.
Granted, the most recent US recession (which went for 18 months) was the longest since the Great Depression — almost 100 years ago, but:
- From 1854 to 1919, a typical recession lasted 21 quarters, or a bit more than five years, data from the National Bureau of Economic Research shows.
- Between 1919 and 1945, that average fell to 18 quarters, or four and a half years.
- Modern day recessions are estimated to span 10 quarters, just two and a half years.
Still, some allocators — like Akshat Vaidya, head of investments at Maelstrom, the debut fund of the family office of BitMEX co-founder Arthur Hayes — aren’t confident that crypto could make it through unscathed.
Vaidya told Blockworks he expects crypto to move just like it did during the 2020 Covid crash, “implode along with the rest of the world come recession, as liquidity vanishes in the cascade of margin calls.”
That could still lead to a positive outcome over the long term.After all, bitcoin skyrocketed more than 900% in the quarters following the 2020 recession, jumping from below $7,000 to as high as $69,000.
“Not only will high-quality projects survive, but they will thrive in the easy money policies that follow,” he said, adding that investors focused on quality could see an opportunity to be “greedy when others are fearful.”
Bitcoin halvings help crypto practice for recession
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.
“With each halving event where the new supply of bitcoin is reduced by half; every halving event to date has preceded a significant increase in the bitcoin price as well as a correction to follow,” Jesse Shrader, CEO at Lightining-focused startup Amboss Technologies, said.
On the other hand, government stimulus has shielded parts of more traditional industries, including leading up to and throughout the pandemic recession.
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, managing director at bitcoin financial services firm Swan Bitcoin.
“Can you survive several months or even years of a recession? Now is a good time to evaluate whether you are credibly solving a big, urgent problem with a uniquely valuable solution,” Yang said, adding that’s something few cryptocurrencies have done.
For investors, Yang said bitcoin’s fundamentals in the long-term remain unchanged, especially over horizons for longer than five years.
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