Experts project that the world will face an economic downturn next year. Some even claim that people are now bearing the brunt of the recession. Experts claim that the U.S. stock market could lose $9.5 trillion because of this. Furthermore, banks around the country are shutting down branches and laying off employees. But what does this mean for cryptocurrency? Will it even help crypto trading?
While many people like to invest in stocks, bonds, and mutual funds, others want something that can give them more of an edge in terms of returns on investment. A popular way to do this is by investing in cryptocurrencies such as Bitcoin, Ethereum, and Litecoin. But how will these currencies be affected as the recession continues?
In this article, we’ll explore how economic downturns affect crypto and what this means for investors and the rest of the world. But before that, check this link if you want to confidently start your business in whatever economic environment you’re in.
Bitcoin Versus Stock Market
In both cases, it’s important to remember that timing matters most. If you buy stocks before a recession and sell them during the economic meltdown, your return would be way lower than if you just held onto them until after the recession ended.
This also applies to cryptocurrencies. If you bought Bitcoin when it peaked in December 2017 and sold it at its bottom in February 2018, your return would likely be abysmal compared to buying it at any other time.
Most importantly, though, what makes investing in cryptocurrency so attractive is that its creator developed it to fight economic meltdowns. While this might be Bitcoin’sBitcoin’s first potential recession, its previous patterns show its resilience. It might not be immune to the crisis, but it can bounce back even stronger.
What Does This Mean to Investors?
Bitcoin has already confronted six bear markets in the past. The trend shows that it may drop in a high-interest-rate economy like stock market indexes, only to come back stronger. This, therefore, represents a great investment opportunity for investors.
Bitcoin is a store of value, meaning it does not lose its value in times of economic hardship or crisis. Unlike fiat currencies, such as dollars and pounds, which can be affected by inflation and depreciation during such events, Bitcoin will remain unaffected. This makes it an ideal investment choice when you’re worried about the economy’s impact on your portfolio.
A few years back, one Bitcoin cost around $2k to $3k. Buying one Bitcoin today costs around 22,000 USD. It could go up or down depending on which exchange rate you look up. Since banks, governments, or countries can’t regulate the value of this currency, it’s not associated with any geopolitical risks.
Bitcoin is Better Than Stocks During Bear Markets
Bitcoin is a better investment during bear markets than stocks. The data shows that Bitcoin’sBitcoin’s correlation with the stock market is lower than stocks. Further, it has a lower correlation with other asset classes and currencies. It also has a lower correlation with the global economy.
Bitcoin is a better hedge than gold during bear markets because its price tends to move in the reverse direction of stocks and bonds. Still, it does not have an inverse correlation with oil or other commodities, though different factors may influence the latter.
Downtimes Helped Raise Demand for Crypto
As a result of the pandemic, most countries’ economies have turned for the worse. The Gross Domestic Product (GDP) decreased, and unemployment increased significantly. In times like this, people instinctively look for alternative forms of currency to store their wealth. Cryptocurrency is one such alternative since it was not adversely affected by economic downturns and recessions like traditional fiat currencies were.
Economic Downturns May Be Good News for Crypto
In a bull market, the total capitalization of cryptocurrencies is now at $1.025 trillion. This is precisely the figure that economists predicted two years ago. However, an economic downturn might be good news for crypto; cryptocurrencies are still a new and speculative market yet to reach maturity.
As we have seen in previous recessions, people will turn to safe assets like gold and other precious metals to protect themselves against financial uncertainty. In this sense, cryptocurrencies may provide similar benefits as they do not correlate with other asset classes like stocks or bonds during economic downturns.
Recession Might Not be Doom for the World
The bottom line is this: Despite what many fear, a recession may not be the worst thing for cryptocurrency. It could help drive demand for crypto by bringing out more people who now have less money to invest elsewhere.
While this may not seem like much of an advantage at first glance, we don’t know how long the present state of the bull market will last before it turns bearish again.
The economic downturns might become more frequent as climate change progresses and requires us to change our lifestyles accordingly. If we invest in cryptocurrency, these crises might be less than catastrophic.