- >Why Crypto Is Well-Positioned to Weather a Coronavirus Recession
Why Crypto Is Well-Positioned to Weather a Coronavirus Recession
Much has been made of the fact that Bitcoin, or any other cryptocurrency, is not a safe-haven asset. When the Dow Jones tumbled by 15% between March 10 and March 12, Bitcoin plunged by almost 37.5%, fatally undermining any notion that it would store its value at times when stocks and fiat currencies lose theirs. However, while it would now seem that the cryptocurrency market is, in certain cases, correlated with stock markets and the wider economy, this still doesn’t mean that crypto is set up for as large a fall as the global economy.
Simon Chandler | Nov 19, 2020
In the wake of the coronavirus, economists are already predicting a harsh recession for the U.S. and other major economies, while some are claiming that “the risk of a new Great Depression, worse than the original – a Greater Depression – is rising by the day.”
However, it’s unlikely that crypto will be as damaged by a recession as other sectors of the global economy. While a serious and prolonged recession may certainly depress cryptocurrency prices, the cryptocurrency ecosystem itself is well-positioned to weather an economic storm.
Why? Well, because of cryptocurrency’s main strength and selling point: decentralization. Truly decentralized cryptocurrencies such as Bitcoin and Ethereum are the products of hundreds if not thousands of individual contributors. Rather than being reliant on a centralized corporation that could suspend operations or even go bankrupt during a recession, the likes of Bitcoin have evolved as a result of the contributions of numerous volunteer, semi-professional and professional coders.
As such, their developers can continue working from the comfort of their bedrooms while the rest of the economy remains shut down. And more generally, while the Federal Reserve begins a program of hypothetically “unlimited” quantitative easing, Bitcoin and other fixed-supply cryptocurrencies will still promise the financial advantage of deflation.
Decentralization Protects Against Recession
In the United States and Europe, the number of new coronavirus cases is rising exponentially. America’s confirmed COVID-19 cases are doubling every 3 days, according to data from the European Center for Disease Control and Prevention, and now stand at just over 55,000 (as of writing). It’s therefore clear that things are going to get noticeably worse before they get better.
In other words, a recession is almost certainly coming, and with it, most sectors of the global economy will be severely impacted.
But once again, crypto won’t be one of these impacted sectors. First and most importantly of all, decentralized cryptocurrencies aren’t products or services manufactured by corporations, which need to sell things in order to survive. True cryptocurrencies are the open-sourced products of geographically distributed development communities. They rely largely on unpaid volunteer developers, as well as on semi-professional and professional developers who receive funding from a variety of sources, such as developer funds like the MIT Digital Currency Initiative.
It’s possible that sources of patronage from Square, Chaincode Labs and other organizations might dwindle during a recession. However, the unpaid volunteers will still be there, at the very least, while developers that usually get paid would still likely contribute.
Meanwhile, nodes (i.e. people with computers) can still run the software for cryptocurrencies and keep their respective blockchains running. Similarly, the mining ecosystem generally adapts its costs and efficiency to cryptocurrency prices, so even with a substantial fall in prices, hashrate can still rise if miners can lower their operating costs.
Essentially, decentralized cryptocurrencies have the perfect structure for surviving economic crises. They’re adaptable, independent, and (arguably) antifragile, meaning that they can grow as a result of stress and volatility.
Unlimited Fiat Currencies, Limited Crypto
And in the longer term, cryptocurrencies could come out very well from a major recession. Because already, even though the full impact has barely been felt, the Federal Reserve has announced that it will make unlimited bond purchases.
Put differently, the Federal Reserve could pump an unprecedented amount of new US dollars into the economy, driving up inflation. Other central banks (in the United Kingdom and the EU) have announced similar measures, indicating that other major currencies may also experience inflation, assuming that economic growth doesn’t match the growth in the money supply. And given that the global economy could have a serious depression on its hands, its output could easily fail to keep pace with rising cash levels.
So with the Federal Reserve and other central banks providing further proof that fiat currencies can be manipulated and devalued almost at will, the longer term effect of a coronavirus recession may be the increasing legitimisation of fixed-supply cryptocurrencies such as Bitcoin. Because in an increasingly precarious economic climate, more people may be driven towards crypto, just as they’ve been in places such as Venezuela, which has already experienced its own inflation crises.
“Fed Announces Unlimited QE”
This is why Bitcoin was created.
— Bitcoin (@Bitcoin) March 23, 2020
Of course, in the short term, it’s likely that a serious recession would put severe downward pressure on cryptocurrency prices. With unemployment likely to hit five million in the US, people will obviously lose much or all of their incomes. Those with cryptocurrency holdings may be forced to sell them off in order to make ends meet, something which would obviously depress prices.
However, in the event that the US dollar and other major currencies experience inflation, crypto could in the longer term end up benefiting significantly. Either way, there’s little doubt that, thanks to its decentralization, crypto will keep ticking away in the background of a major economic downturn, while major industries struggle to survive. And in the aftermath, it may just emerge stronger than it has ever been.