With the cost of living going up and purchasing power dwindling with every passing day, many are wondering if we’re about to witness another global recession. While experts are divided on the chances of a recession actually happening, most are still advising investors to safeguard their assets.
The big question is, how?
We’ve already seen what happens to the stock and real estate market with the not-too-distant Great Recession of 2007-09. That said, we now have one asset that we didn’t when the last recession started: Bitcoin.
Great Recession 2007-09
Can this digital currency save your assets from an economic crisis? Join us as we analyze expert opinions, historic data, and recent trends to find out!
Bitcoin as a Safe Haven Asset
To summarize, a Safe Haven Asset is an investment that retains its value, no matter how dire the overall economic situation gets. We’ve also seen some definitions of "Safe Haven Asset" categorize it as an investment that increases in value during a recession.
So, is Bitcoin part of this exclusive club? The answer to this is more nuanced than just yes or no, and here’s why:
Why BTC can be a Safe Haven Asset
From what we’ve seen, if the recession does happen, all indicators point towards a fall in the value of USD in the global market. When this happens, investors will likely lose trust in this fiat currency and there is a good chance that many of them turn toward Bitcoin as a replacement.
Now the thing is, unlike fiat, Bitcoin has a limited total supply of 21 million BTC that can ever be mined. So, if the demand increases, this hard limit on supply will drive the price of BTC up — even during a recession.
Related: How many Bitcoins are left to mine?
Bitcoin's performance during past recessions
Unfortunately, there is no way for us to analyze Bitcoin's performance during past recessions because BTC has never experienced a full-fledged recession. The closest to a major financial crisis we saw was during the pandemic but we’ll discuss that later.
Factors Influencing Bitcoin's Performance in a Recession
As we just mentioned, we can’t know Bitcoin's performance in recessions accurately, due to a lack of proper historic data. We can, however, make educated predictions based on how certain factors play out. These key factors are:
While we use the term recession as a singular concept, there is actually more than one type of recession. An example of this is the V-shaped recession with short-and-sharp contractions followed by rapid and sustained recovery.
The point is, different levels of recession can leave the global economy in different conditions and Bitcoin will likely behave accordingly. If the recovery from the recession is fast enough, Bitcoin can stay fairly stable. But, if it goes on for longer, the value of Bitcoin will depend on the following two factors.
Is Bitcoin a good investment? In our experience, you’ll get a different answer for this depending on who you ask. Some will say, “Yes, Bitcoin is a good investment. In fact, it is like digital gold.” While others will simply laugh at the idea of a volatile cryptocurrency being a viable investment.
This mixed investor sentiment is during relatively normal economical conditions. It will most likely shift during a recession and drag the value of BTC with it. For example, if more investors started viewing Bitcoin as “digital gold,” its demand will increase and the market value will follow suit.
Bitcoin is often considered as a replacement for fiat. While it is yet to show any signs of actually taking over the mammoth that is the USD, the potential is still there. And, it is this potential that can shine in the face of crisis depending on institutional adoption.
Think of it this way. If today, major supermarket chains started accepting BTC as a valid payment, a lot more people will consider investing in it. The same can happen during a recession but on a much larger scale.
Potential Benefits of Bitcoin During a Recession
Let’s view this question from a positive angle. Here’s what we believe are the biggest benefits of Bitcoin during a recession:
Limited supply against inflation
The fiat currency system — by its very design — is highly susceptible to inflation. We’re simplifying a bit here, but there isn’t an upper limit on how much fiat can be printed. This can lead to an oversupply of money, devaluing the whole system and leading to the 1 trillion Zimbabwe Dollar note you might have seen on the internet.
Bitcoin, however, is immune to this issue since we can’t mine more than 21 million BTC. This limited supply prevents overinflation and keeps the value of the cryptocurrency from crashing.
Related: How many Bitcoins are left to mine?
The second major benefit of Bitcoin in our eyes is its decentralized nature. In other words, its value cannot be dictated by any one government.
Don’t get us wrong, if the USA enters a recession, the value of BTC will be affected since a lot of people in the US own BTC. However, the impact of the US government's decisions and management would not be as severe on BTC as it will be on USD.
Risks and Challenges for Bitcoin in a Recession
There is a lot we can praise about Bitcoin, but it isn’t a perfect currency system either. These are our biggest concerns about the risks and challenges Bitcoin might face during a recession:
Bitcoin is not stable, far from it. Even in the last 12 months, Bitcoins value dropped by half in November since its peak in May 2022. It then doubled by April of 2023, returning close to its valuation around the same time last year.
Bitcoin to United States Dollar
As you can see from this fluctuation, Bitcoin is very volatile and difficult to predict. This makes it a risky investment in normal financial situations, let alone a recession.
Related: What Is the Bitcoin Rainbow Chart?
While Bitcoin is decentralized, regulators can deem it illegal and block its conversion into fiat. We’ve seen this happen in many countries over the years with the most notable name in this list being China.
So, who is to say that regulation can’t block BTC for a certain country during a recession? If that does happen, everyone with major BTC investments would get in a tough financial spot immediately.
The unregulated nature of BTC can also make it susceptible to market manipulation by large-scale institutional investors. There are laws to prevent this sort of thing from happening, but they are very difficult to enforce ahead of time.
How to avoid these risks
Don’t put all of your eggs in one basket, even if you’re sure that the basket is very sturdy. In other words, we recommend diversifying your investment across crypto and other fields. Relying on one asset — be it BTC or something else — is a recipe for disaster.
Case Studies: Bitcoin Performance in Previous Recessions
As we mentioned above, Bitcoin has not seen a proper recession yet. But, let’s analyze what happened during the pandemic — the closest comparison we have.
In the beginning, Bitcoin saw an immediate drop in value as soon as the lockdown started. But, then its price started going up and reached a record high in April 2021. This was followed by a price correction dip and then another record high in November of the same year. Today the price of Bitcoin is a lot lower, but still more than double what it was before the pandemic.
So, what does this price movement teach us? Unfortunately, nothing concrete. Factors — like the stimulus checks — skewed the results by a lot.
Expert Opinions and Forecasts
Expert opinions on Bitcoin’s performance are just as varied as the general sentiment on the matter.
Some experts cite its decentralized nature and limited supply as their reason for investing in Bitcoin in case of a recession. Like Dominic Basulto who says that Bitcoin is the first thing he’s buying if a recession hits.
On the other hand, Investing reporter Brian Baker states that “Crypto is no safe haven” as it can also crumble during a recession.
Both of these sides bring up valid concerns and merits. Ultimately, the key point to understand from these varying opinions is that we know very little about how Bitcoin will behave during a recession.
All we can do is make educated judgment calls based on how other traditional assets behaved during the past recessions and how that relates to crypto.
From what we’ve learned writing this article, there is no way to accurately predict the behavior of Bitcoin during a recession.
There is a lot of uncertainty that makes a precise assessment extremely challenging. Not to mention factors like regulation and market sentiment that can have a massive impact on the final outcome as well.
The best advice we can give you here is to do your own thorough research. Also, consult a professional if you’re actually serious about investing in Bitcoin to protect your assets in case of a recession. Even then, diversify your investment as much as you can.