The past few months have been a worrying time for investors of all kinds. For many, the emphasis has largely shifted from making massive gains to simply staying afloat as inflation woes and the ongoing effects of Russia’s war in Ukraine prolong the market’s general downward trend. Although it’s a matter of debate whether the U.S. is currently experiencing, or is headed towards, a recession, it’s abundantly clear that we are not enjoying the post-pandemic boom many investors had hoped for.
During times like these, investors tend to proceed with more caution than usual. As a result, cryptocurrencies, which are notorious for their volatility, are rarely the first asset that comes to most investors’ minds. While there is some credence to this idea, there are also reasons to believe that it will be worth keeping an eye on crypto in the near future.
“To understand where cryptocurrencies might go from here, it’s essential to look past the headlines and at the history,” says Zain Jaffer, tech entrepreneur and CEO of Zain Ventures, an investment firm focused on crypto, real estate and proptech initiatives. “In slumps like these, we tend to zero in on the present, but we run the risk of missing out on huge opportunities if we don’t also learn from the past and look towards the future.”
Crypto and Recessions: A Brief History
Although it remains to be seen how cryptocurrencies will perform during a full-on recession, it is instructive to remember that cryptocurrencies were initially developed in the aftermath of the 2008 recession as a way to combat growing mistrust in central banks. By creating secure peer-to-peer networks backed by transparent, immutable records on the blockchain, these currencies eliminate the need for third-party financial institutions. They provide an alternative to government fiat, which is highly vulnerable to inflation and devaluations based on geopolitical events, and so may gain in popularity as confidence in fiat declines.
Because cryptocurrencies are not tied to a single country’s economy or a single economic event, they have the potential to remain unaffected by fluctuations in the value of other currencies. Recessions have a tendency to affect nations with shared economic interests: because the economies of, for example, the U.S. and E.U. are so closely intertwined, both were hit hard by the 2008 downturn, while some developing countries actually grew during this period. Cryptocurrencies are not subject to these same national interests and alliances, meaning that recessions in a particular country or group of countries may not affect their value.
“Cryptocurrencies have not yet weathered a recession, so we cannot say with certainty how they will perform,” says Jaffer. “However, elements of their technology were designed to correct the faults that led to a scenario very much like our current one. As their use continues to grow around the world, it’s fair to assume that their borderless nature will become an increasingly valuable asset.”
Potential Risks
Of course, the fact that cryptocurrencies are not tied to any one country’s economy does not mean that they are immune to macroeconomic factors. Changes in government regulations and institutional adoption have profound effects on the value of cryptocurrencies, so it’s essential to stay on top of these developments. As always, maintaining a diversified portfolio is crucial, and moving too much money into crypto could be a risky move, especially as regulations tighten.
Moreover, past experience has proven that there is a correlation between the value of cryptocurrencies and the performance of the tech sector as a whole. Although correlation does not equal causation and we may not have sufficient data to pinpoint the underlying reasons behind this phenomenon, it’s still a useful pragmatic framework.
Finally, cryptocurrencies, like all other investments, are profoundly affected by general hype and fear. These emotional factors are especially pronounced in the crypto space, however, as their value is highly speculative and subject to fluctuations within the crypto community itself. As a result, it’s absolutely necessary to keep a finger on the pulse of the crypto world and maintain a strong grasp of general trends and attitudes within the space.
Opportunities
There are still major opportunities to be had within the crypto market, however. Even in the worst-case scenario that the general economic downturn causes crypto prices to plummet, this will necessarily be a temporary phenomenon. The two most recent periods of crypto devaluation, which occurred in 2015 and 2018, saw huge returns for those who invested while the assets were cheap and held onto them until they climbed back up in value. “While it is never advisable to put all your eggs in one basket, keeping a close eye on macro trends and setting aside some funds to invest in crypto could lead to handsome profits during the next spike,” Jaffer says.
On the broader scale, there is reason to believe that present economic difficulties might cause more individuals and institutions to take a serious look at cryptocurrencies as alternatives to the drawbacks of the present generation of currencies and banking. In order to hasten this transition, however, it is not enough for those in the crypto community to sit back and wait for things to change by themselves. Educating others on the history and potential of these currencies is a necessary step in bringing a larger section of the population on board.
