10 Jul 2022 · 6 min read

The Coming Recession is Going to Hit Crypto, but Not as Hard as You Think

Source: Adobe/Sergey

 

  • "The squeeze on people's disposable incomes caused by high inflation has had a big negative impact on stocks & crypto markets."
  • "We're now in a highly volatile economic environment, so it's almost impossible to look much further ahead with any degree of confidence."
  • "We don't need a return to economic growth to kick-start the crypto market, we need a recovery in the Nasdaq index of tech stocks."
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If a recession isn’t here already, many economists estimate that it is coming very soon. The largest in the world, the US economy contracted by 1.6% in the first quarter of the year, and even if it somehow doesn’t contract in the second quarter, a growing number of economists are predicting a recession for 2023.

There’s no doubt it’s a bad time for the global economy right now, with inflation reaching 40-year highs and central banks threatening a series of rate hikes. It’s also a bad time for the crypto market, seeing as how prices have fallen steeply around the same time that economic activity has shrunk.

However, opinion is mixed on whether we’ll see a severe recession in the coming months (or years), and it’s also mixed on whether any such recession would have a big impact on major cryptoassets. That’s because there’s an argument that cryptoasset prices aren’t correlated with the global economy so much as stock markets, which could rally again if inflation subsides and rate increases stop.

A recession is already hurting crypto

Many economists and analysts seem to agree that the US -- and many other developed economies -- are already in recession, given that the technical definition of a recession is two consecutive quarters of negative growth.

“The squeeze on people's disposable incomes caused by high inflation has had a big negative impact on stocks & crypto markets, and has probably already pushed the US economy into recession. Recent surveys of consumer confidence are showing their worst readings for decades, people are feeling the pain and are cutting back on investment as well as on spending,” said Glen Goodman, a cryptoasset analyst and author of The Crypto Trader.

Despite a general consensus that the economy is shrinking right now, some commentators also highlight the role, not just of inflation and rate hikes, but also of a steep withdrawal of fiscal support (which had previously arrived in the form of quantitative easing).

“The bottom line is 2022 is the hangover from one of the biggest asset price bubbles in history on the back of unprecedented liquidity, fiscal and monetary. It is being taken away at a breakneck pace as evidenced by the about 35% drawdown in the Nasdaq 100 Stock Index and the greatest [Federal Reserve (Fed)] rate hike in a meeting since 1994 (75 bps in June),” said Bloomberg Intelligence Senior Commodity Strategist Mike McGlone.

For him, a prolonged recession isn’t a given, but what’s more likely is that the current slowdown will act as a kind of catalyst for a fundamental contraction of the crypto market. In other words, the current economic climate may be part of a process that sees the crypto market shed “silly speculate things like Shiba Inu” and other minor altcoins.

“Recession is less certain than reversion in asset prices and the about 20,000 cryptos listed on CoinMarketCap show the issues with too much supply and ease of entry -- price headwinds. I fully expect the primary beneficiaries -- bitcoin (BTC), ethereum (ETH), and the proliferation of crypto dollars [, or stablecoins] -- to remain intact and bitcoin to continue the process of becoming the benchmark digital collateral in a world going that way,” he told Cryptonews.com.

How bad can things get?

While there’s little doubt that advanced economies are already contracting, if not in an outright recession, analysts aren’t entirely convinced that things could be bad for long. This holds out hope that the current bear market may not overstay its welcome.

“For the immediate future, I'm actually fairly optimistic, because commodity prices are plummeting. Oil, gas, copper, cotton, wheat, corn, and many other vital commodities are now way below their peak prices, and this should help to bring inflation down quite soon,” said Glen Goodman.

Indeed, oil prices have been falling repeatedly over the past few weeks, dragged down by recession fears. This may end up instigating some kind of self-corrective mechanism, with the reduced prices eventually prompting more economic activity and growth.

“Hopefully that will mean the US economy starts to recover quickly, but how long this relief will last is anybody's guess. We're now in a highly volatile economic environment, so it's almost impossible to look much further ahead with any degree of confidence,” said Goodman.

While there’s a chance that any recession could last more than a few quarters, Mike McGlone suggests that it won’t be especially severe or deep. This is largely because it would be part of an almost naturally rebalancing of the economy, away from excessive liquidity.

“We have reached the limits of pumping liquidity into the system [...] so the Fed will be very reluctant to ease until the whites of the eyes of deflation are quite clear. Implications for a prolonged period of underperformance, notably for the equity market are clear and are far from profound given the elevated level [of excess liquidity],” he said.

In this environment, McGlone said he expects BTC, US long bonds, and gold to be top performers, although he accepts there will be bumps in the road as the economy gradually stabilizes.

Exit strategy

While an improvement in economic performance would ultimately be beneficial for the crypto market, what it really needs, according to Glen Goodman, is an improvement in the performance of stocks.

“We don't need a return to economic growth to kick-start the crypto market, we need a recovery in the Nasdaq index of tech stocks. Cryptos have been highly correlated with the fall in the Nasdaq since November,” he told Cryptonews.com.

Basically, Goodman’s prediction is that stocks will rally as soon as inflation starts declining and the Fed indicates it will stop (or lower) rates. Of course, when this is going to happen is anyone’s guess.

Regardless of when economic growth returns, Mike McGlone predicts that bitcoin will still be a better bet than most other assets, particularly when we return to a low-inflation environment. He’s not necessarily as optimistic about most other cryptoassets though.

“I expect bitcoin to resume its outperformance trajectory vs. most assets, notably equities in a deflationary environment, which I expect to be enduring,” he said.

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Learn more: 
- Bitcoin Lifeboat, Long Recovery Road, & Exaggerated BTC Deaths: Saylor, CZ, and Professor Weigh In
- As inflation ‘Mellows Out’, a Bottom in Crypto is Likely in ‘The Back Half of 2022’ – VC Investor

- More Crypto Meltdowns Could Be Seen This Summer, but the Worst Is Behind Us - Pantera's Morehead
- We Now Understand How Little We Understand About Inflation – Fed’s Powell

- Bitcoin Better at Tackling Rate Hikes than Ethereum, Stocks - Report
- Soros' Fund CEO Says Crypto is Here to Stay, Warns of Recession and FOMO Trap

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