What Would a Long-Lasting Recession Mean For Bitcoin?

Amid the skyrocketing inflation, the war in Ukraine, and other macroeconomic and geopolitical uncertainties, more and more experts are starting to warn that a recession is right around the corner. Commodity and food prices have soared since Russia invaded Ukraine.

Meanwhile, there’s a debate about whether the U.S. Federal Reserve will be able to engineer a soft landing as it tries to unwind the unprecedented levels of fiscal and monetary stimulus that supported the pandemic. It’s unsurprising that so many people are talking about the possibility of a recession amid the staggering number of troubling circumstances the world faces right now.

Bitcoin and the Last Two Recessions

However, not everyone is convinced, given the signs of potentially tentative strength in the U.S. economy. And what about bitcoin? Whenever the next recession occurs, whether it’s in the next year or two or a decade from now, it will be the first significant recession in which bitcoin and other cryptocurrencies existed.

Of course, the National Bureau of Economic Research, which is tasked with determining when a recession is occurring or has occurred, ruled that the U.S. experienced a recession from February to April of 2020. However, conventional wisdom defines a recession as at least two consecutive quarters of declining GDP growth, which might cause some economists to disagree.

Given that the pandemic-era recession lasted only two months, it hardly qualifies for that definition. However, the first quarter of 2020 saw a 5% contraction in GDP, so the NBER ruled that the period was indeed a recession, although it added that recessions typically last “more than a few months.”

If You Blinked in February or March 2020, You Missed the Recession

In deciding whether there was a recession in 2020, the NBER considered the depth of the GDP contraction, its duration, and whether there was a broad decline in economic activity. Of course, the pandemic recession was easily the shortest ever recorded, with the next shortest lasting six months, from January to July 1980.

The 2020 recession was over in a blink—long before anyone even noticed that there might have been a period that could qualify as a recession. The NBER didn’t even rule that a recession had occurred in 2020 until July 2021. Thus, two months is hardly enough time to get an idea of how Bitcoin would behave in a recession.

Of course, some will recall that the concept for bitcoin, the original cryptocurrency, was created out of the turmoil caused by the Great Recession in 2008, potentially in response to the government bailouts of major banks. The genesis block was mined in January 2009, allowing the first transactions to start a blockchain.

However, even if the Great Recession did give rise to the idea of the decentralized payment system we now know as bitcoin, the fact is that it didn’t exist during the last significant recession. As a result, when it comes to investing in BTC, it’s anyone’s guess what bitcoin or any other cryptocurrency will do if or when a long-lasting recession hits.

How Likely is a Recession in the Coming Years?

The likelihood of a recession occurring in the next one to two years varies, depending on whom you ask. A flood of opinion pieces trumpeting the odds of a recession in either direction is inundating the internet. Everyone from BlackRock, the world’s largest asset manager, to Tesla’s CEO Elon Musk is weighing in on the possibility of a recession in the near future.

There’s also a variety of different potential causes of a recession. For example, World Bank President David Malpass said this week that the war in Ukraine and the impact on food and energy prices, and the availability of fertilizer could trigger a global recession. Some even suggested that cryptocurrencies could cause the next recession.

Aside from inflation, other potential causes include a Fed mistake, which may be unavoidable because it has held interest rates close to zero for so long, leaving it no choice but to raise interest rates while the economy slows. Economist Peter Schiff recently said that the Fed can’t win the fight against inflation without causing a recession—a “far worse financial crisis than the one we had in 2008.”

On the other hand, Bank of America CEO Brian Moynihan doesn’t seem to think a recession is coming soon. He cited spending habits and monthly increases in consumers’ Bank of America accounts. Boston College economics professor Brian Bethune also said that he doesn’t think a recession is coming, pointing to signs of economic strength in the U.S.

However, a talk at the World Economic Forum in Switzerland this week suggested that a slowdown is already occurring in Europe, meaning a U.S. recession won’t be far behind.

Join our Telegram group and never miss a breaking digital asset story.

So What Does This Mean For Bitcoin?

Since the next recession will be the first significant one for bitcoin, there’s no real track record that we can look at predict what the cryptocurrency might do. Of course, we normally expect gold prices to go up and some stock prices to go down.

Sectors that benefit from rising interest rates should hold up better than those that don’t if the Fed is forced to raise rates into an economic downturn due to runaway inflation. Consumer discretionary sectors should see declining earnings and stock prices, while discount retailers and stores that sell necessities should do better.

So what about bitcoin? In February 2020, the bitcoin price stood at around $8,800, and it fell to about $6,500 in March. By April, the cryptocurrency had recovered to around $8,800, and at the end of 2020, it was approaching $30,000, which is about where it stands today after plunging from its record high of nearly $70,000.

However, bitcoin’s behavior in 2020 can hardly be seen as an indicator of what to expect in the next significant recession. Or can it? After all, the cryptocurrency is so new that it’s still jockeying for position among the major asset classes.

What Kind of Asset is Bitcoin?

Over the years, many crypto enthusiasts have touted bitcoin as a sort of digital gold, which would suggest that it should move in lockstep with real gold, meaning soaring prices in a recession. However, that’s not what we’ve been seeing this year.

Bitcoin is down by about 40% year to date, while gold prices are up slightly after falling since their spike in March. Additionally, it seems like investors don’t even know what to do with gold because while many economists shout, “Recession!” and run for the exits, other market watchers are touting economic signals that suggest things aren’t as bad as some are saying.

An analysis of the major asset classes’ performances this year reveals that bitcoin has become strongly correlated to U.S. stocks. In fact, CoinDesk reported in April that the 90-day correlation between bitcoin and the tech-laden Nasdaq 100 has been elevated since 2020 and hit a new high this year.

This correlation suggests that investors should be looking to tech stocks rather than gold for clues about how bitcoin might behave in a significant recession. Interestingly, many crypto enthusiasts were quick to say that bitcoin soared during the 2020 recession while Nasdaq-listed stocks plunged. However, at the end of the year, bitcoin had gained 50%, while the Nasdaq Composite was up by more than 40%, demonstrating the correlation that was in its early stages.

Do you think a recession is here or right around the corner? What do you think will happen to bitcoin and other cryptocurrencies in the event of a recession? Share your thoughts in the comments section below.