Why Cryptocurrrency is the Perfect Recessionary Hedge

Introduction

The new Fundstrat survey making the rounds shows that institutional investors see cryptocurrency as an anti-recession financial tool. The survey goes on to detail how institutions think of crypto this way because during recessions, fiat currencies tend to lose value. This is 100% true and cryptocurrency along with precious metals and commodities are the ultimate anti-recession instrument. Another issue these assets help to deal with is inflation. But how does all of this make sense?

What Are Recessions and Why Do They Occur?

Recessions are a fundamental aspect in economic cycles. One of the most important elements for any asset or market is that they enjoy up-cycles that create wealth and lead to monetary gains but they also must rough through down-cycles where wealth creation takes a back seat and growth slowdowns lead to loss in values. Sometimes, these losses can be catastrophic and lead to long term damage to the economy. Take the 2008 sub-prime crisis for example, the greed of investment bankers and asset managers to collateralize debt ended with them creating a bubble in the economy that popped and came crashing down on the very ground they stood on. The main reason for this was that Americans were led to believe the housing market could not crash. They took absurd amounts of mortgages, and banks started to give high interest loans to sub-prime customers. A sub-prime customer was a person whose rate of default was significantly higher due various reasons such as cyclical or low income, bad credit scores, etc. Mortgage debt reached an all-time high of $12.68 trillion and led to the collapse of the housing market as well as the national and global economy. Today, the total mortgage in the United States stands at $12.73 trillion, just a tad bit above the high from 2008. The economy has grown stronger and as a general rule of thumb, previous highs are taken out before the next down-cycle starts. This can be applied to debts, stocks, or any other asset.
The main point to take away here, is that recessions are initiated by fundamental drops in value and economic slowdowns and are taken over by a massive drop in consumer confidence which leads to the colossal correction and essentially an economic depression.

Cryptocurrency as a Hedge

By market cap, daily volume, and popularity, Bitcoin is the Godfather of the cryptocurrency market, so I will take the example of Bitcoin when talking about cryptocurrency. When you think about the elementary properties of Bitcoin, amongst the first few aspects ‘deflationary’ and ‘decentralized’ stand out as the most important.
By being decentralized, no one entity can influence or control the network. It has led to the truest democratic system since ancient Greece. Within decentralization, the most important aspect is that the government has control over it. This is the single most key aspect of Bitcoin or most cryptocurrencies that set it apart from traditional investments or payment mechanisms. While people make the argument, that the government has full control over the resources needed to run a Bitcoin node and hold up the entire network such as hardware, network, and physical infrastructures, as well as electricity, think about the use case in the aftermath of a major economic depression. Cryptocurrency has properties no other asset class does. They are valued purely based on investor confidence and other measures of psychology. There is no such concept as intrinsic value and hence there is no adequate level of correction that brings it down to a ‘reasonable valuation’. Apart from this, it is also deflationary, meaning the supply reduces with each time period, leading to each unit becoming more valuable as the implied interest rate increases. Institutions as well individuals would flock to these assets in times of distress as a means of not just hoarding value but to bypass governments.

Best and Worst Case Scenarios if an Economic Depression Comes Our Way

Best Case: An economic slowdown grips the global economy and people look for a way to hedge their cash and traditional investments which are rapidly losing value. They find this in the form of digital assets that are deflationary in nature and cannot be meddled with by governments except in the form of manipulation. People flock to cryptocurrencies in an attempt to lose minimal value on their investments and fiat currency. This helps adoption as well as the implementation of cryptocurrency to the mainstream economy as a means of not just store of value but also as payment remittance mechanism. When it comes to government manipulation of cryptos, the idea is that governments have their hands full with stimulating the economy, they cannot possibly take their hands off that steering wheel for a second to attempt to dissuade investors from moving to crypto. Moreover, if they were to do so, they would putting their own citizens in a worse off position by increasing their already rapidly moving losses. Hence, a rational government would embrace cryptocurrency and stop seeing it as drug laundered money.

Worst Case: A recession of massive scale hits the world and assets see colossal down-cycles. Market participants start to anticipate this as being the biggest down-cycle in modern history. Jobs are cut, wages fall, and people are desperate to find any means of economic stimulus. People start to lose faith in the government’s ability to re-stimulate the economy. They reach out to each other in an attempt to influence the governments of the world to take necessary action. Livelihoods and dreams are destroyed, the impact spreads over billions of people. After a certain duration, patience wears out with the average citizen, and they look for a means to create what the government should on their own. They start to abandon fiat currency and take to non-governmental means of exchange (cryptocurrency). They create their own private economy and decisions are taken based on the majority consensus. Unlike today’s ‘democratic’ society, there are no leaders or representatives that can skew democracy into their favor. Each person is their own representative and majority decisions are taken as the network consensus, and growth progresses in that manner.

Precious Metals

Gold and Silver top the list of precious metals that are fungible and can/have serve(d) as means of exchange. Essentially, each currency was tied to Gold and hence Gold is the oldest surviving form of universal exchange as well as the only currency before man-made paper backed by nothing came into existence. Silver on the other hand has real world uses such as in electrical circuits, mirrors, and medicine. Gold and Silver became metals used for jewelry solely because of their perceived value to their history as a method to store value. They are timeless and will probably never cease to be the best recessionary hedge. However, due to their indivisibility, and the high value of each unit, Gold and Silver cannot be used as common currencies compared to Bitcoin which can be divided to the 8th decimal as well as most cryptocurrencies which are further divisible.

Conclusion

Some economists have controversial views of a major economic bubble popping leading to largest recession in history. Amongst these, a few notable ones are James Rickards and Nouriel Roubini. Even Jamie Dimon, MD & CEO of J.P. Morgan has said the likelihood of another recession is 100%. As we recently cross the major debt highs from 2008, people need to start thinking of ways to conserve wealth in case such an event is to occur. Humans have a tendency to only react after the event has occurred. Looking in hindsight, it is about time the average Joe starts think about their future and create a plan to overcome these hurdles well before they actually arrive. With the current Emerging Market situation, confidence is slowly coming down from unreasonably high levels. This could be the start of a long and gradual way down. Being extremely critical and being overly optimistic are both harmful. The best solution is to find your own mix of both of these to view not just economic, but all major global and local events.