Bitcoin And The Recession
After the bull market in March, cryptocurrencies fell along with the stock markets. Will a recession lead to a cryptocurrency crash?
As it turns out, 2020 is an interesting year. We started with bushfires in Australia, then the fear of World War III, and now we have an epidemic on top of that. Moreover, an economic recession may follow in the coming months.
However, the market expects Bitcoin to be a safe haven for investors. But massive volatility suggests otherwise. And as we see, what has been a safe haven for investors can change dramatically.
So let's dive in and see what's going on with Bitcoin , cryptocurrency, and the financial crisis .
What is a financial crisis?
To understand how it affects Bitcoin, let's first understand what a financial crisis is and how it leads to a crash .
It can be understood that the financial crisis is a sudden event that causes great instability in the market . Events such as the bursting of a bubble or a sudden stock market crash can seriously affect the performance of business relationships.
And because industries are interconnected, if payments between parties break down, a financial crisis can turn into a collapse. And if the company does not receive the money, it cannot give the money to someone else.
Because it is a time of economic uncertainty, corporate failures are more common during financial crises and stock markets tend to be lower.
The term recession refers to a part of the business cycle where most economic activity declines . Recessions are often accompanied by falling GDP, high unemployment and low consumer confidence.
Usually, a country can declare a recession if its GDP shows negative growth for two consecutive quarters . There are exceptions when the government declares a recession based on other economic indicators, such as monthly GDP data, especially when conditions deteriorate rapidly.
Once a recession begins, it can take anywhere from a quarter to several years for markets to adjust.
Coming to the causes , there are many factors that lead to the total collapse of the economy. Some of them:
- Great confidence in the market
- Pure market success
- Get non-refundable loans
- Unemployment
- Supply chain disruption
- Pause between purchase and payment
- War
- danger
- Epidemic
In principle, if the financial system is as deeply interconnected as it is today, anything that disrupts our normal global economy is likely to lead to collapse.
Autumn 2008
In 2008 , when the financial system nearly collapsed due to the housing bubble , the world went through its last recession.
At a time when liquidity flooded the market and credit was readily available, banks offered home loans to qualified borrowers. This eventually led to a significant increase in prices.
As the housing market was doing well, investors began investing heavily in mortgage-backed securities . In addition, banks turned loans into collateral bonds. When interest rates began to rise, many subprime borrowers could not afford the higher interest rates and defaulted on their payments.
Side note: Covered bond. a financial product backed by a credit union that is sold to investment banks and then resold to investors.
A separate statement . Default: A situation where the debtor does not make the agreed payment to the creditor at the agreed time.
The main problem was that financial institutions and hedge funds held more than $1 trillion in outstanding mortgage securities . This situation has caused more and more companies to approach bankruptcy. And as each major company went bankrupt, it put more people out of a job.
As the unemployment rate rises, consumer confidence declines and the situation worsens.
Governments around the world have begun buying distressed assets, including debt-backed securities, to stave off financial meltdown.
Are we headed for failure?
Economists and market analysts predict another decline in 2017. A bond market crash in 2019 would undoubtedly be the financial crisis that would lead to a recession.
It didn't happen. However, in the year 2020, an unexpected pandemic isolated the world and halted economic activity. This sounds like a trigger.
The created situation can cause significant damage to hotels and travel companies. But if we look at the Dow Jones Industrial Average , the FTSE 100 and the S&P 500 , we can see a general slowdown in the economy.
Source: Hargreaves Lansdowne
Source: Yahoo Finance
All stock markets are in the red, supply chains are blocked, economic activity is suspended or limited, and workers cannot work normally. It seems that a fall is approaching.
Sold by panic and fluid demand
In tough economic times, financial advisors recommend investing your money in securities such as bonds, gold and silver. Also, gold rose to a historic low, but the coronavirus appears to be causing it to fall as well.
From where? Because people want money.
The unprecedented world has become a situation where people are only looking for physiological and safety needs. Investing in stocks, bonds or anything else is not a priority.
The sudden high demand for cash led to sales that in some cases could not even be sustained simultaneously.
Whether it's stocks, government bonds, gold or cryptocurrency, it's worth nothing compared to toilet paper.
Encryption failure. Shouldn't Bitcoin be crash-proof?
Bitcoin emerged after the 2008 financial crisis due to a lack of trust in a centralized financial system. The cryptocurrency revolution started with the goal of creating a secure decentralized financial system where everything is protected by code.
There is no inflation because there is a fixed amount of Bitcoin. Additionally, it is considered a digital alternative to gold as a store of value. An increase from $10,000 to $5,000 can make a scammer question their ability.
Ultimately, all cryptocurrencies are based on the public belief that they are worth something. In some ways, it is not very different from fiat currencies.
However, the cryptocurrency market is known for its high volatility. And such a fall does not mean the collapse of cryptocurrency.
Bitcoin and altcoins have recovered from the worst and if this question is still on your mind. "Will cryptocurrencies make a comeback ?" Go to CoinMarketCap and check it out first.
Worst case scenario for cryptocurrency
The fear that the cryptocurrency market will lose all its value is nothing new. Doomsayers play this crypto card to get media attention when the market goes down.
But behind all this fear is the reality. Unfortunately, there are some players in the market who can manipulate the price as they wish. In the cryptocurrency community, they are called dots .
If whales decide to destroy Bitcoin once and for all, they have the ability to do so. If they start selling and all the creators lose faith and sell their assets for fiat, prices could drop to unprecedented levels.
And if the price drops too much, miners will leave the network because consuming energy to create hash power will be too expensive to be sustainable.
This means that cryptocurrencies with working confirmation chains lose speed and security.
However, the cryptocurrency may not collapse just yet. Cryptocurrencies that use less labor-intensive proof-of-stake and other consensus algorithms can also recover from such an event .
Either way, a pandemic like the coronavirus could put an end to cryptocurrency. Such as. Well, when society collapses and the internet stops working, everything in the digital world will disappear.
But I guess that won't matter when the world goes mad Max.
Best case
In fact, cryptocurrencies have lost 30-50% of their value in less than a few days. It is their bad habit.
Widespread business sales and shutdowns in all markets are taking a toll on the economy. But Bitcoin is not a business and cannot fail and disappear . And when Bitcoin gains credibility, the entire cryptocurrency market gains credibility.
In the best-case scenario of the cryptocurrency market, more and more people are finding bitcoins and altcoins as a convenient store of value due to the financial crisis. Demand is rising, and so are prices.
Quantitative Efficiency and Bitcoin Demand Statement
To ease the financial crisis caused by the pandemic, the US government announced on March 15 that the Federal Reserve would cut interest rates to zero and launch a massive $700 billion quantitative easing program. Many governments around the world have announced similar measures.
While this may mitigate a further downturn, such global QE could lead to further reductions in inflation-driven liquidity .
Holding a lot of cash against your will can soon become a bad idea .
Interestingly, according to Google Trends, interest in the search terms " Bitcoin " and " Recession " appears to have increased following the announcement of a price cut and quantitative easing.
Final thoughts
Bitcoin is seen by many as "digital gold" and is expected to hold its value in a good downturn. However, the coronavirus has caused a global sell-off that has also affected the cryptocurrency market. While cryptocurrencies have crashed along with traditional markets, a cryptocurrency crash is not imminent. The cryptocurrency market seems to be slowly recovering.
In addition, fears of a recession, quantitative easing, and lower prices seem to be driving Bitcoin interest back into the summer of 2019 as the price reaches $12,000.
In this socio-economic situation, the halving of Bitcoin and the launch of Ethereum 2.0 could bring more power to the market than society has ever seen.
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