Key Takeaways
- During recessions companies or assets that rely on speculation are wiped out; if people are still holding or investing in an asset when money is tight, that indicates its real long-term value.
- Even though crypto was born on the heels of the last housing crisis, it has proven itself due to surviving the Covid-19 global pandemic. Even during the failure of a few US and European banks that held cash reserves for major stablecoins, Bitcoin rallied. This behavior highlights that the crypto markets move to the beat of their own drum and move based on different interpretations of major events.
- Crypto assets are usually inversely correlated with the US dollar and most traditional asset prices. Due to several factors including high market volatility, the truly global nature of the asset class, and the limited understanding/ interpretation of crypto market participants, no one authority can definitively answer what moves the crypto market and why.
How has monetary policy impacted the crypto markets?
In the case of cryptocurrency, most governments have taken steps to protect their markets through laws either banning the use, requiring registration and therefore taxes when a profit is made on a trade, or recognizing crypto as a new asset class and have incorporated it alongside the traditional asset classes.
These individual actions are important, but no one government or agency has been able to impact the crypto market through its decisions. The one exception thus far is the US Federal Reserve (Fed) which indirectly impacts the market via its inflation rate adjustments. When the rates are raised, investors move to government bonds, Treasury Bills, and cash because these are seen as safe assets. Crypto investors may see up to a 70% drop in asset prices during these times.
During quantitative easing, there have been rallies as seen by Bitcoin’s (BTC) 1000% price increase as seen during 2020-2021.
Even though a direct causal relationship has not been established, expansionary policies do cause “cheap” money to flow into crypto, however, factors such as the FTX collapse, banking collapse, and other factors not related to monetary policy have caused large swings to take place in the market.
Crypto assets are more than just their prices as they have additional standalone utility. For example, storing/ processing decentralized data, and being an internet-native way of global value transfer. Some central banks have tapped into this new transfer method by creating central bank digital currencies (CBDCs). CBDCs are cryptocurrencies by all standard definitions, but they do not add to the market value as these are closed blockchains with limited public interactions still controlled by a central actor.
While their use adds to the social narrative surrounding crypto, unless an open blockchain is being used, there is no real value being added to the global space. Using Ripple’s XRP or an open blockchain (think BTC or ETH) to facilitate transactions would involve mining and thus the overall crypto ecosystem.
Should I buy crypto during a recession?
Bitcoin was launched on the heels of the 2008 Great Recession, additionally, COVID-19 proved that the crypto-space can survive a global pandemic. Crypto was born, it remained relevant and the network of miners, validators, and users grew despite these two major global economic disasters. Decentralization represents the strength of the network that supports any major crypto-asset and once this can be proven, it is the starting point for deciding to build a crypto portfolio.
The typical advice is to buy the dip, hold, and then sell once the prices have rebounded. This does not always work as with any other market the crypto-market moves to the beat of its own drum. The best advice when looking to purchase any asset is to:
- Understand the problem being solved via reading the whitepaper. If there is no clear problem being solved, then the project can be a scam and is not worth your while.
- Look into the community on the various platforms. By looking at the conversation it can be determined if the project’s team is moving forward with the promised deliverables or if the asset is just another pump-and-dump scheme.
- Review the tokenomics- who holds the majority of the token/ coin? What use has been given to each coin? Is the coin just to purchase something with a closed ecosystem or can it be used and adopted by a wider community? The answers to these questions determine the usefulness of the project.
- Finally, look into the price action, volume, and the source(s) of the volume.
If the answers to these questions can be found, then, one can consider buying and building a portfolio during a recession when the prices are typically lower.
Conclusion
Before purchasing any asset class, it is important to do your own research, determine value for yourself, and build a portfolio based on a chosen principle as the token/ coin does have risk involved in its purchase. It is best to buy any asset when the prices are lower as is usually seen during a recession and to sell when prices rebound. Always have a plan before entering any position as it can go to zero or gain multiples in value based on the movement of the market.
Via: 2Usethebitcoin.com
