What to expect from crypto in a recession

Whenever President Joe Biden starts discussing a possible recession, the news media and the public start to get a little wary. In the coming weeks, we can expect arguments to arise about whether the US is actually in a recession, but one thing is clear – we are teetering on the edge.

To get a measure of the economy, great emphasis is usually placed on the country’s gross domestic product (GDP) as a key indicator. If GDP declines for two consecutive quarters, recessions begin to heat up.

While a recession depends on a number of factors such as unemployment, industrial production, retail sales and income, many are concerned that a prolonged recession may be on the way as macroeconomic factors such as inflation and supply chain problems do not resolve as quickly as originally hoped.

With two consecutive quarterly declines in GDP to start in 2022, by some standards, a recession has begun. Unlike the last Great Recession, however, there is a new asset class on the financial landscape, and it deserves to be evaluated.

What about crypto?

Cryptocurrencies have existed, for the most part, at a time when the US was never really that close to a prolonged recession. Since the Great Recession, the only time GDP entered recession territory was in 2020, when the COVID-19 pandemic began and economies around the world effectively shut down.

The cryptocurrency market simply hasn’t been around long enough for us to get an idea of ​​how it behaves in a significant recession. The first cryptocurrency invented was Bitcoin (BTC 7.94%) in 2009, and a lot has changed since then. However, there are a handful of periods of poor economic performance over the past 13 years that we can look at to get an idea of ​​what crypto’s future might hold if a full-scale recession occurs.

One of the few periods of economic instability since 2009 occurred in 2015. After 2014, GDP grew, albeit at incrementally lower rates each quarter, finally bottoming out at a 0.1% growth rate in the fourth quarter of 2015.

The S&P 500 also posted its first negative year since the Great Recession of 2015. During this time, the crypto asset class was completely crushed. The collective market capitalization of all cryptocurrencies fell by almost 70% from the beginning of 2014 before reaching a low point in mid-2015.

Another period of recent economic instability came in 2018. Similar to 2015, the country’s GDP grew, but by a smaller amount each quarter, eventually falling to just 1.3% growth. In 2018, the S&P 500 posted its worst year since the Great Recession, losing 6% of its value.

Crypto investors who have been around since 2018 are likely aware of the woes that year brought. After reaching a peak of around $750 billion, the cryptocurrency market capitalization plummeted, eventually falling to as low as just $107 billion, representing a catastrophic 85% decline. Bitcoin fell from around $19,000 to just over $3,000.

The opportunity awaits

It is quite clear that during periods of slowing economic growth, cryptocurrencies are not spared. In fact, they are often the hardest hit. When fears of recession arise, it is not uncommon for cryptocurrencies to lose three-quarters of their value during these times. But amidst these periods there is a silver lining.

Investing at the bottom of these cycles in 2015 and 2018 would have produced monumental returns. Since Bitcoin makes up a very large proportion of the crypto market cap, we will use it as a proxy to measure the opportunity that potentially awaits in 2022.

If you invested $1,000 in Bitcoin when it hit a low in mid-2015, that $1,000 would be worth more than $80,000 by 2017. Let’s say you bought the bottom of the 2018 crypto winter. That $10,000 would have been worth almost $20,000 if you had held on until Bitcoin reached a new all-time high in 2021.

As long as fears of a recession persist, crypto will likely struggle to make significant gains. Investors willing to take advantage of these depressed prices to lower their cost basis can position themselves for gains similar to periods like the 2017 or 2021 bullruns.

No one will be able to say exactly when economic sentiment will change, so no one should try to time the market, but when macroeconomic conditions improve, we can expect cryptocurrencies to recover just as the economy has done in the past.