There’s no such thing as a “recession-proof” investment, but some types of investments such as digital assets might fare if the economy slides into a recession.
The threat of a recession is real, and many consider it inevitable. With stocks falling into a bear market due to fears that aggressive rate hikes from the Federal Reserve and a sharp rise in inflation will plunge the economy into a looming recession, many are wondering: should you invest in crypto during a recession? And should it be viewed as a safe haven or is it at risk of further declines due to its speculative nature?
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What To Expect From Crypto During A Recession
Tammy Da Costa, Analyst at DailyFX comments:
"Looking back at 2020 when the Coronavirus pandemic drove the global economy into a brief recession, Bitcoin shed approximately 62% in one month (from Feb – March 2020). After that, quantitative easing and large stimulus packages enabled crypto to rally which was exacerbated by Elon Musk’s endorsement. Now, the narrative has shifted.
Quantitative tightening and rising inflation have reduced the purchasing power of consumers. Institutional investors and major crypto exchanges are taking strain and many are on the brink of collapse. Over the past two months, the collapse of Terra, Celsius, Three Arrows Capital, and job cuts from several key players (including Coinbase) are making the resumption of a bullish move even more challenging. With aggressive rate hikes expected to continue for the remainder of the year, digital assets are in a difficult position unless a change in the fundamental backdrop eases recession fears."
Scott Sheridan, market expert, and CEO of tastyworks comments:
"I’m not sure crypto can be considered a safe haven given its volatility. I think part of the appeal of crypto was related to equity valuations being high. You had a lot of money chasing alpha and the perceived risk/reward in chasing high valuation equities was too risky. Crypto, on the other hand, doesn’t have the same valuation metrics. It’s still in its infancy and so are its valuation models. That ambiguity, with respect to valuations, is what allowed for investors to justify chasing prices higher. If I’m right on that, then I would expect the volatility in crypto to outlast the volatility in equities, something you don’t want if you’re seeking a safe haven.
I don’t see crypto turning around until equities do and market volatility subsides, as measured by VIX. Once we get back to a VIX near its mean of 18, then I think you’ll see equity prices stabilize and at that point, you might see crypto stabilize or begin moving higher. Until then, I think the combination of potential alpha in equity markets and the evolving state and subsequent turbulence in crypto are more geared toward speculation than they are sheltered from the storm.”
Dr. Martin Hiesboeck, head of blockchain and crypto research at Uphold:
"The digitalization of the economy includes the adoption of blockchain technology. Investing in digitalization also means investment in automation, cybersecurity, software systems and machine learning. Many digital assets are closely connected to that space and should do very well ESPECIALLY in a recession. The only pure money in what erroneously is called "cryptocurrencies" is Bitcoin. It has failed to live up to its inflation hedge promise so far.
Currently, we do not believe that we are in a recession or a stagflation scenario at all. The situation is more like after WWII, when we had a few years of high inflation and slow growth before the world recovered from the shock of war. The situation now is very similar. Institutions are well aware that blockchain technology has a place in their business models and is something they cannot ignore. Solid digital asset projects with real-economic utility will do well regardless of the macroeconomic environment."
About tastyworks
tastyworks is an online brokerage platform built specifically for options traders. The up-and-coming online broker is a subsidiary of tastytrade, one of the fastest growing online financial networks in the world.
About Uphold
Uphold is a multi-asset digital money platform offering financial services to a global market. Uphold's unique ‘Anything-to-Anything’ trading experience enables customers to trade directly between asset classes with embedded payments facilitating a future where everyone has access to financial services.
About DailyFX
Launched in 2002, DailyFX.com, the free news and research website from IG, is one of the world's leading sources for news and analysis on the currency, commodity and index trading community.
