Though the financial crisis ended a decade ago, there is an evident turmoil that still exists in the global economy. Many experts suggest that a crisis will hit soon in 2020 and might lead to another economic catastrophe. With the speculations of a recession, curiosity about cryptocurrency as an alternative to the traditional investments has been soaring. While crypto fanatics consider Bitcoin as Digital Gold and a Safe haven, economists are sceptical about it.
In this post, ChangeHero will elucidate how bitcoin would be performing in a recession and what would be the impact of an economic crisis over it.
Amidst a Turmoil
For starters, a financial crisis is a situation where assets see a sudden fall in their value. In such cases, consumers and businesses will be unable to pay their debts. This results in a chaotic behaviour like investors selling off assets and withdrawing savings. The financial crisis of 2007–2008 has the most devastating effects. It was caused due to the subprime mortgage lending in the US and infested the whole world with stock markets plummeting.
Amidst the clamour of the global recession, Satoshi Nakamoto launched the Bitcoin in 2008. The genesis block of the first-ever transaction on blockchain contains the following message, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. The quote manifests the dissatisfaction of Satoshi over the flaws of the traditional financial systems. It is evident that the 2008 global financial crisis inspired the birth of the Bitcoin stimulating a radical move to liberate the economy from brick and mortar banks.
Good as Gold
Till the ’70s US Dollar was backed by the Gold reserves and Gold enjoyed the ultimate position in the hierarchy of money. It is believed that Gold preserves wealth while the value of the dollar is eroded due to inflation. Though the Gold Standard System was abandoned, Gold is still considered to be a safe haven for investments and serves as a hedge. During political and economic turmoil, investors look towards hard assets and invest in Gold. Besides, gold is also a diversified investment that is not correlated to the stock, bonds and real estate.
Contrary to the popular beliefs that Gold would raise during inflation, Gold prices dropped during the global crisis 2007–2008, though not as worse as the rest. This can be connected to the severe liquidity shortages faced by the banks and the flawed countermeasures. To make things worse, banks ran out of the eligible collateral and came up with expedient to sell off the borrowed Gold. This sky-rocketed the supply of the Gold in the market and prices fell by around 30% reaching $740. Despite this fall, Gold was the first to recover after the crisis and regained its position as a safe haven in the following years.
Lately, Bitcoin is being called the “Digital Gold” due to its similarity with Gold. Bitcoin is scarce as only 21 million of them will be mined and Gold is also considered to be a scarce good as well. Both of them are extremely durable and are fungible. In some cases, bitcoin has an edge over the former like storage capability, mobility, security, and ease of use.
In the event of an economic crisis, there are two possible scenarios.
The first would be a liquidity crisis in which people find it hard to pay off the debts and run out of money. In such circumstances, people will be selling off their bitcoins to pay the bills. This would result in the excess of supply and lead to a fall in the price of the digital currency.
On the other hand, if a currency crisis occurs, Bitcoin would be faring well. In a currency crisis, the value of the money drops and people lose trust in it. In this regard, people lean towards the assets to store their wealth like Gold. Bitcoin has more odds to pull the audience as it is easier to acquire it during economic instability.
There has been growing evidence suggesting that in crisis-stricken economies where the currency is highly inflated, crypto is functioning as a daily driver (Give this article a quick read for more info). Bitcoin has the potential to be a safe haven for investors during a currency crisis. Though it appears to be promising, there are a few concerning blotches such as volatility, technical limitations, lack of awareness and trust. Regardless of the downsides, crypto enthusiasts and investors argue that Bitcoin will be a viable alternative to Gold during an economic slowdown.
A Safe Haven in the Long Run
The notion of Bitcoin being “Digital Gold” is feasible. However, gaining the confidence of the masses take enormous time and in the long-run, it would possibly be a safe-haven for investors. If so a crisis occurs in the near future, it would trigger the awareness and adoption of bitcoin and cryptocurrency. Nevertheless, Bitcoin has the potential to enable instant payments for everyday use.
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