Economic analysts say that the recession in the US is intensifying and this could be a “difficult problem” for cryptocurrencies.
On Aug. 30, global investment bank UBS put the risk of the U.S. entering a recession within a year to 60 percent, up from 40 percent in June. According to economist Pierre Lafourcade, the latest data shows a 94% chance that the economy is in recession, but this is not a full-blown recession
The cause is attributed to bad debts, or unpaid debts for more than 90 days by credit borrowers. According to Citigroup CEO Jane Fraser, the organization is pleased with its liquidity and credit quality. Moreover, Reuters said that the financial sector wiped out only 0.1% of loans in Q2.
This is an inevitable scenario in the current context, but how can an overall recession be avoided? If that happens, companies will face declining earnings as rising inflation limits consumption. Central banks raise interest rates and shrink their balance sheets. Either way, the pressure on corporate profits is huge and this puts pressure on the stock price.
The pricing dynamics for cryptocurrencies are very different from stocks, corporate debt, and the stock market. The truth is that there are no set metrics or indicators to calculate the token price. Market participants have different views on protocols and their use cases.
The stock market, on the other hand, has proven valuation indicators and has been used consistently for decades. These indicators are highly appreciated by analysts, experts, and investors.
Regardless of how one measures the success of the stock market, this must inevitably depend on profit margins, revenues, interest rates, and the US dollar exchange rate. That’s why a stock can fall 70% or more even before a recession hits the market, as the stock desperately needs a constant revenue stream. However, for the cryptocurrency market, this is unlikely to be accurate.
Understanding the stock market and commodity pricing
The first rule of stock valuation is that investors have different inputs, expectations, and timeframes for a stock. The patterns, indicators, and recommendations of analysts are very important factors. However, there is no guarantee that the share price will inevitably follow any rationale.
We can chart Price/Earnings multiples, Enterprise Value/EBITDA, or any company metric that investors keep a close eye on. However, no one can predict what the future holds for those companies, even those with long-term contracts, such as the energy sector.
Traders should not confuse volatility with valuation. A company has stable and predictable cash flow, but that can become a liability in the event of a bull market as other sectors grow. Moreover, stock market prices are never immune to the vast economy. And the collapse of a financial institution can also drag down partners.
For example, the real estate market in New York. Even in a period of underdevelopment, there will be no change in the utility of land, including housing, commercial space, and agriculture. If a worsening crisis causes a breakout, even land is likely to rise in price as some investors will stockpile hard assets.
The same can happen for oil, gold, or cattle. There is no need to have a constant stream of income to maintain the value of those assets. In worst-case scenario, with no more gold and oil to be mined, their prices are likely to rise due to a decrease in supply.
What impact does a recession have on cryptocurrencies in the end?
The fact that investors consider Bitcoin (BTC) and Ethereum (ETH) as commodities, and new technological currencies is not a serious problem. Both of the above products have extremely limited production schedules, which will be retained even if the hash rate and validators are reduced by 90%. The use of this schedule makes the digital asset transmission system always work as planned.
As previously said, cryptocurrency prices can be hit hard by a prolonged economic downturn, but there are rare cases where the network is disrupted by inflation, rising interest rates, or credit defaults. This rule cannot apply to Walmart, UnitedHealth Group or Ford Motor Company, and all the top 20 revenue companies.
However, failed companies are unable to reserve assets during downturns, meaning assets can be liquidated and shareholders receive nothing. The decentralized aspect of cryptocurrencies protects investors from worst-case scenarios, including delisting from major exchanges.
At the same time, the shock of a global recession, such as the collapse of the housing market and the growing distrust of the financial system could pave the way for alternative hard assets, including cryptocurrencies.
For now, it may sound like a distant dream, but a full-blown recession would be the first major global financial crisis the cryptocurrency has experienced since bitcoin’s inception in 2009.
Whether or not the cryptocurrency valuation will last has not yet been decided. So far, the sector has suffered major setbacks from market participants, including exchanges and lending intermediaries. Therefore, one can say that it has overcome the initial challenge, although it is now too early to make final judgments.