Are Bitcoin and Other Cryptos Good Hedges During a Recession? Experts Weigh In
While fears of a recession have scaled back in recent days, experts are split as to where the U.S. economy might be going. In parallel, the debate around whether bitcoin and other cryptocurrencies are good hedges during a recession is bubbling up once again, as the space has been enjoying institutional adoption and has gained mainstream legitimacy lately — largely due to spot bitcoin and ethereum exchange-traded-funds being approved by the Securities and Exchange Commission this year.
Bitcoin has long been touted as an inflation hedge, akin to gold. What’s more, the crypto ecosystem as a whole has bounced back this year, yet experts are split as to whether cryptos can truly be recession hedges.
Good Hedge Thanks to Its Scarcity
While some experts argue that they always see bitcoin and crypto as a hedge, they also concede that these assets take a beating when there’s a downturn in the market — just as happened earlier this month. As Morning Brew reported, between Aug. 3 and Aug. 5, bitcoin dropped 20%, to below $50,000 — its lowest price since February.
According to Phillip Shoemaker, executive director, Identity.com, the U.S. government is going to continue to print money, and as bitcoin is a scarce asset, it will serve as a very good hedge in such an environment.
“If you hold dollars and bitcoin during a recession, one of those is going to go massively up once the recession is over — and that will not be the dollar,” he added.
Rob Chang, CEO, Gryphon Digital Mining, agreed with this premise, saying that as bitcoin is underpinned by a decentralized network, it is shielded from the vulnerabilities that typically affect fiat currencies and stock markets during economic downturns.
In addition, he said that the asset, with its fixed limit of 21 million coins, coupled with increasing global acceptance, insulates it from the economic pressures that weigh on more centralized financial systems.
Good Hedge With Lower Rates
Another point experts made is that if the U.S. were to enter a recession, the Federal Reserve would “dramatically lower interest rates.”
In turn, this would impact the interest rate paid to money market accounts, certificates of deposit and savings accounts, which investors have been flocking to due to the high-interest-rate environment of late, said Peter Eberle, president, CIO, Castle Funds.
He added, however, that as rates decrease, investors will look to move those funds into riskier assets, including bitcoin, which would be bullish.
“As interest rates continue to fall and bitcoin’s price rises more and more, investors will follow that trend, and that increasing demand will push bitcoin prices higher,” he added.
Not So Fast
On the other hand, some experts are fast to point out that bitcoin — and cryptos in general — are not only extremely volatile but are also speculative assets.
“Bitcoin as a safe haven? Not so fast,” said David Materazzi, CEO, Galileo FX.
According to Materazzi, unlike gold, which has a proven track record in recessions, bitcoin’s extreme volatility and lack of history during economic downturns make it a risky bet.
“As a speculative asset, it could easily nosedive when investors seek stability. With no proven performance in such scenarios, relying on bitcoin as a hedge is more of a gamble than a sound strategy,” he added.
At Some Point
In the long-term, some experts argued, bitcoin will serve as a hedge. For now, it is also perceived by some “as something like a tech stock,” experiencing some short-term fluctuations enroute to new all-time highs, according to Carter Feldman, founder, QED Protocol.
“Bitcoin has consistently outperformed gold over the past decade, and it’s growing stronger by the day,” he said, adding that it will continue to outperform gold if we look back 10 years from now.
This is something several experts have reiterated — notably, Zach Pandl, Grayscale head of research, who argued that were the U.S. to experience a recession, bitcoin could take a hit, albeit a lesser one than in the past.
“Bitcoin is a risky asset with a positive correlation to stocks, and its price could be expected to fall in a recession — as it did in early 2020 with the onset of the COVID-19 pandemic,” Pandl recently told GOBankingRates.
In turn, he said that the best advice for most investors is to buy and hold a diversified portfolio of assets and to avoid market timing.
What About Other Cryptos?
Beyond bitcoin, other cryptocurrencies, such as ethereum, may also present hedging opportunities, but it carries its own set of risks tied to market fluctuations and the success of the platforms built on it, according to Ronen Cojocaru, CEO of 8081.
In addition, stablecoins such as tether and USD coin offer a safer option by maintaining stable values pegged to fiat currencies, but they lack the growth potential of bitcoin and ethereum, making them more suitable for preserving capital than generating profits, Cojocaru said.
And when it comes to altcoins, they generally present an even higher level of risk, as their smaller market capitalizations, lower liquidity and speculative nature make them unreliable as hedges during a recession.