Updated: Oct 3
As much as we believe cryptocurrencies are drowning, one must remember that every asset adjusts itself to the economic pyramid. The question stands- How, knowing that- It isn't a formal part of our federal reserve? The digital currency fluctuates through demand and supply, one of the factors responsible for the economy. We may deny cryptocurrencies being a part of our financial chain, but the data opposes it. According to the New York Digital Investment Group 2021 findings, 22% of the US adult population — or roughly 46 million Americans — own Bitcoin. The currency has jumped to over 7000% since 2015. Companies like Microsoft, Paypal and Wikipedia accept Bitcoin as a payment system, so the denial to consider its penetration in our economy is living a lie. Having said that, cryptocurrency is still a decentralized asset with no outcome. Then why is it falling? Is it the end of the blockchain-based financial chain, or the crypto recession is a reason behind it?
That's a lot to answer at once, so I will divide it into three sections:
Expand to read.
History And The Market Preview. The Crypto Recession. Aftermath Of The Crypto Recession: Is It The End Of Crypto?
History And The Market Preview.
To understand this, we will take a step back and hear what history has to educate. Since the 1900s, there have been 19 recessions. To understand the crypto recession, however, I will pick up the findings from the 1929 and 2008 recession periods.
1. During the 1920s, US stocks rose to unprecedented levels causing many to believe- it was a great way to make money. People from all classes, including ordinary ones, started investing. Part of this population took mortgages to make investments. The loans were to be repaid by the profits. But as soon as the market declined in October 1929, most of these investors panicked and liquidated their holdings. Results were a 33% decline in stock prices between September and November. The same caused fear among the consumers and businesses, which resulted in lesser buyings, unemployment, and a reduction in manufacturing.
2. Fearful of their bank's solvency, numerous customers attempted to withdraw their deposits. As a result, one-fifth of the banks failed, leading to lesser consumer and business buying. The situation deteriorated when the federal system announced higher interest rates to reduce the money supply and maintain the gold reserve. (through which the US and many countries tied their currency value to a fixed amount of Gold). Further, because of this action and gold reserve, the shockwaves of the depression were transmitted to other parts of the world, mainly Europe.
3. Effects of this started with borrowers as they had no option other than to pay back their loans on time. The lack of funds in the market forced many companies to shut down as they didn't have enough orders. The standard of living was negatively affected, and because of the gold standard and the connective economy, the world experienced it as well.
Summary: One of the major causes of the dark times of the 1900s financial world was overinvesting, bank failures and growing speculations, and a drop in world trade and government policies. The after-effects were unemployment, a decrease in consumer and investing activities. The period lasted almost ten years, but after that, the economies grew vastly to the point when the 2008 recession kicked in.
The Great recession of 2008 originated in the USA when financial markets experienced severe liquidity contractions. It was triggered when in 2001, banks issued mortgages to low-risk customers (who wouldn't have qualified in the first place) at decreased prime rates. As a result, numerous house loans were granted, and the housing demands and prices skyrocketed. But in 2005, when interest rates climbed, house demands for even the qualified buyers dropped, and the prices declined along with it. It happened because the subprime buyers could no longer afford their loans, nor they could sell them at higher rates or take an additional loan on the property (as the property valuation dumped). This alerted banks to stop lending amounts to sub-primer borrowers that accounted for significant portions of their assets. The complications rose to a level where banks began to doubt each other for solvency, leading to an interbank credit freeze. The move severely impacted credit lines for wealthy institutions, and firms started cutting down expenses by firing the workforce. Amid this, certain institutions were found to boast fake portfolios and had to accept government bailouts.
History repeated itself, and consumers and investors started doubting the market situation leading to lesser economic activities. As the foreign banks invested in American MBSs, the slowdown reached most industrialized economies (with China, India and Indonesia as an exception).
Summary: During this period, the US economy was at its peak until the stock market dropped by almost 50 per cent because of the lenders alone. Consumer and investing activities declined again, and as expected, unemployment rose.
This time, the fears of it gave birth to Bitcoin- eliminating the authority that central banks hold.
The Crypto Recession.
The mistakes still exist. In the 1920s, when the stocks rose, investors collected money from the banks to continue making profits. Similarly, I came across a report which says- About a quarter of crypto investors took loans for the investments. As the cryptocurrency initially fell, more and more people started withdrawing (similar to 1929), and now it is resulting in a period we may call a crypto recession.
Bitcoin is a commodity similar to houses (2008 recession) and as the markets have prospered so much in the last decade, the crypto recession can only become a reality. The speculations are at an all-time high, and unlike before, crypto marketers are frightened because of the incoming policies from government institutions.
Last week, however, Bitcoin showed signs of recovery, with many suggesting higher investments to be made in the coming days. The conclusions are backed by how the asset responded during the 2018 slowdown. Bitcoin crashed to its lowest and gained momentum in 2019 as the market prospered. Similarly, the crisis of 2020 occurred, and crypto assets witnessed growth as soon as the market stimulus was activated.
One of the concerns for crypto marketers is the entry of newer assets. Take Dogecoin, for instance- Elon Musk is held responsible for its success. While many made profits during the earliest times, the currency doesn't seem to grow again at a rate where we might consider it a solid addition to our portfolio.
Currencies like this interfere with the long-term market activities of the crypto world, people buy them to make instant profits, and as they liquidate holdings, they never look back. When the losses occur to the investors who came through a social media post or market hype, the tendency of them to consider another currency becomes difficult, declining the market activity.
All these factors can equally contribute to the downfall of the crypto market- what I call the crypto recession.
Aftermath Of The Crypto Recession: Is It The End Of Crypto?
In Short: Absolutely Not!
Cryptocurrencies and even NFTs will stay, partly because of their penetration of the global economy and the technological world. The negative growth in the aftermath of the pandemic and ongoing construction in Ukraine. The Global GDP is on fall, inflation is at an all-time high, employees don't want to return to offices (creating tensions between various firms and working professionals), and thousands have already retired in the pandemic after losing employment.
Looking closely at the situation will tell you that it's hard for any commodity other than essential goods to create demand and gain value. Even the world's most valuable firm- Apple, is afraid to disclose its sales figures, and experts believe they are not pleasing.
That's all from my end! I hope you found it helpful, and let me know if you think investments made during a crypto recession can be rewarding for long-term profits.