Probable Fed-Driven Recession and the Cryptocurrency Space in 2023

If you have been following the news, recently, there has been much talk over cryptocurrencies. Bitcoin made noise in the media space, being the first cryptocurrency, before the other thousands of different cryptocurrencies in today’s markets. Unlike the regular UN-recognized 180 currencies, characterized by paper, cotton, polymer banknotes, and metal coins used in various states in the world, cryptocurrencies tend to be different. They are not in the usual physical form and can only be seen on one’s phone or computer screen, as they are a digital currency hosted in a cash register on the internet.

Bitcoin and other cryptocurrencies make use of what is termed blockchain technology, which is a new type of ledger that stores transactional records in a network, connected through peer-to-peer nodes, in real-time. Banks and federal governments do not make part of the chain, and this purportedly tamper-proof public online database has the provenance of one’s digital asset.

A few companies such as P. J Bernstein, Starbucks, Etsy, Microsoft, Paypal, and Rakuten, have embraced digital currency. However, in general, most people have a hard time spending with it. A 2020 survey revealed that only 36% of small-medium businesses accepted Bitcoin, as a method of payment.

Bitcoin and other cryptocurrencies are volatile investments. They are bought and sold at exchange websites such as Coinbase.com. The volatility of these cryptocurrencies is not new as witnessed in the Tesla-Bitcoin saga when Elon Mask was hit by a $141 million impairment loss due to its $2 billion investments in Bitcoin and later a $128 million gain on the same investment.

Overview of the Current Cryptocurrency Space

Ryan Payne, the president of Payne Capital management firm, argues that Bitcoin is the biggest bubble of our lifetime and it is not surprising to wake up and then it is worthless all of a sudden. Payne’s argument was based on the fact that, unlike oil or gold, Bitcoin has a nil intrinsic value, as there is no real use for it in society. He further asserts that the greater good of all these currencies we use is just as an intermediary, as the world moved away from the gold standard over 50 years ago, and hence the value in these currencies is out of the belief that we have, that they have value. This, therefore, makes Bitcoin primarily for investors.

Cryptocurrencies are regarded by many people as confusing. This is inherent as they are still in their early stages and will eventually get easier to use and be more acceptable when more knowledge about the convenience they bring spreads. Convenience will be in the form of faster, more affordable transactions and increased security. Many experts have encouraged individuals to invest in Bitcoin than lose later by not investing.

Some experts even foresee cryptocurrencies taking power away from the big banks and governments to individuals as it brings sovereignty to everyone. Sovereign individuals will be a product of Bitcoin adoption, as everyone has a fair chance to transact without requiring permission as well as the Bitcoin owner storing the Bitcoin for any length of time, different from fiat money.

Probability of US Recession in 2023

The probability of a recession was raised by 10 points to 33% for 2023 in March 2022. Consequent to the greater uncertainty from the invasion of Ukraine by Russia, the Fed has been putting a lot of pressure on the economy by taking liquidity out of the market, in hopes of shutting down the world’s ninth-largest economy. Following the US tight and aggressive monetary policy, we have noticed the stock market is down while Bitcoin recovered most of its losses.

What Does This Mean for Investors?

Most financial experts foresee Bitcoin as a safe asset in the coming years and outshining the traditional finance investments which will have all its assets inflated, as a consequence of the recession. Bitcoin has the potential to perform well before and during the recession. For investors to be in a safe zone, it would be most beneficial to divest in real estate, bonds and stocks and invest more in Bitcoin. In this bid, these investors would implement a better strategy of not fighting the Fed but rather leaving the US stock market, coupled with aggressive monetary policy tightening.

Avatar

Author: Jason Donaldson