This post first appeared in Frank Chaparro’s weekly column “Mad Crypto,” which is sent to Genesis members’ inbox every Monday morning.
Born in the shadow of 2008’s global economic turmoil, bitcoin has yet to experience a full-blown recession. However, with the Dow experiencing its sixth-worst point drop in history on Monday and the escalating trade war between the U.S. and China, it is difficult to dispel the fear that a recession is looming.
Now, I haven’t the slightest intention to spread FUD, but in the event a recession does happen, it is only natural for those of us in the blockchain space to ask how cryptocurrencies, this new asset class still finding its sea legs, will survive the brutal real-world test of the capitalist market.
If we only look at this past week, then bitcoin may have well triumphed over all other assets to be the safe haven that can hedge the turbulence of the traditional market, which is subject to the influence of geopolitical tension. The cryptocurrency king jumped over 7% on Monday while U.S. stocks tanked around 3%. It is also widely known that bitcoin historically displays a negative price correlation with gold. Therefore, if a recession indeed hits, cryptocurrencies, being the isolated digital island away from price movements of traditional assets, may see a price surge.
Well, at least this is what Morgan Creek Digital Assets’ Anthony Pompliano and Mark Yosko said, which ended up getting the former 1.4k likes on Twitter and the latter a ruthless rebuttal from the CEO of Ritholtz Wealth Management, better known on Twitter as Downtown Josh Brown.
Seeing that neither Brown nor Pomp only provide one view on this issue, I turned to some other investors and scholars for help. Blocktower Capital managing partner Ari Paul observes that “a rough consensus that I agree with is that in a ‘normal’ deflationary risk off recession, BTC falls. In the far-rarer inflationary or debt crisis recession, BTC skyrockets. I think we’re heading for the latter.”
This thesis may be further cemented by Miller Value Partners’ John Spallanzani, who observes that currently, the price of bitcoin is still predominantly driven by market flows such as increasing institutional participation rather than “pure economic and monetary events,” he said.
However, as much as this lack of correlation may insulate bitcoin from the dooming gravitation of a recession, as Brown pointed out, the young asset class is still far more volatile than your good-old gold, stocks, and bonds. Its five-year volatility rate is 75%, far surpassing gold’s 13%, S&P 500’s 13.4% and the 1-3 year Treasuries bond’s 1%.
Perhaps equally importantly, Paul’s prediction that bitcoin will stand out in an inflationary recession also comes with several caveats. First, the University of Chicago economist Gina Pieters cautions us that higher inflation is typically accompanied by higher interest rates on safer assets, and “how that interacts with bitcoin’s demand remains to be seen.” Second, Paul also notes bitcoin’s price will first dip along with other equities before rising as people look to escape chaotic fiat currencies, similar to what happened to gold in 2008, he said.
And to drive home the analogy between cryptocurrencies and gold, Cornell University law professor Robert Hockett predicts commentators like Peter Schiff and James Rickards “will attack crypto as ‘fool’s gold’ and say people should ‘invest’ in real gold,” when they see the decline of fiat currency-pegged stablecoins during a recession.
“Since these two hold gold themselves, their recommendations will grow ever more vehement as they watch their own precious metal portfolios rise in value thanks to all the sucker purchases they succeed in bringing about,” writes Hockett in an email, ending the sentence with a mysterious smiley face, the kind that makes one wonder whether bitcoin will finally thrive amidst financial doom.
Author: Celia Wan