In the case that a slowdown of the global economy and future US-China trade uncertainties send the US into a recession, a drastic change in cryptocurrencies could take place, sending them into a bull run. While these digital currencies may be viewed at first as a safe haven asset for investors, this might only be temporary, and could eventually lead to a financial bust.
Bitcoin ETFBitcoin Boom
During Bitcoin’s early days, there was a prophecy in the financial markets that a huge surge in cryptos would accompany the next bust of the stock market. This prophecy came about as a result of the belief that digital currencies are solid investments for the long term and that they are likely to appreciate, irrespective of what is happening in the markets. While crypto-enthusiasts around the world do not necessarily agree on which crypto is the ‘one true coin’, the fact that they all believe that these coins will offer long term gains, is what unites them and what actually helps to keep crypto prices higher.
Interestingly, while there is no evidence that these believers are accurate, the fact is, many people think the same way. This means that in the case of a recession, even in its initial stages, crypto-enthusiasts will likely quickly load up on their preferred digital coins. When this is done by a large number of traders, this is likely to impact crypto prices, pushing them higher. The fact is, the crypto market is still relatively small compared to equity markets and as a result, prices react even to smaller trading events. The end result of these independent traders buying and selling the same cryptocurrency, will evidently have a big impact on the prices of these coins.
Bitcoin Bust
Looking at the history, and at 2017 in particular, a small downward turn of the stock market sparked a hype that led to a drastic increase in the prices of cryptos, with Bitcoin reaching a high of almost $20,000. The fact that people believe that cryptocurrency is a safe haven asset, helped to push the prices higher, but by 2017-2018, this all came crashing down.
It is evident from this that when there is a crypto rush and the buyers are not ‘real-world’ users of the cryptos but instead traders who are simply buying cryptos as safe haven assets, the end result will be a crash in the crypto markets. Based on this, with investors simply jumping into buying cryptocurrencies as a result of a recession, the end results are not going to be positive.
Recession and the Real Impact
So what does this mean moving forward?
If a recession is going to happen, the risk of another crash in the crypto space is also likely to happen. The risks attached to this crash, would negatively impact many players in the market, such as risk-tolerant investors as well as retail investors.
In 2017, when the prices of cryptos started to fall, billions of dollars were lost. Those that were hurt the most were new investors who had traded with money they could not afford to lose. With all of this in mind, it is important to really understand something. Many people buy cryptocurrencies simply because they also want in on the trading action of owning this new form of digital currency. With so much uncertainty and people struggling in terms of financial stability and securing a good career, crypto exchanges are easily able to entice traders into buying cryptos. They sell these new traders ‘the dream,’ selling cryptos as a glimmer of hope for the future.
The fact is, if you want to be a successful trader, do not get sucked into a cryptocurrency bull run. You certainly do not want to be standing on the other side when it all comes crashing down.