If a global recession were to happen in the future, many believe that cryptocurrencies, bitcoin primarily, would benefit.
The fluctuating price of crude oil could impact many industries around the world. As recently as April this year, the WTI future for May’s crude oil price took a devastating turn, as it plunged into the negatives, -US$37 per barrel to be exact. The falling demand is due to a combination of factors such as the global economic uncertainty, Saudi-Russia price war as well as the ongoing coronavirus pandemic. A growing number of companies were folded during the past few months, as quarantine measures and the lack of market demands have caused many businesses to be able to sustain during the first half of this gloomy year. The cryptocurrency industry is in no way spared from the chaotic turmoil of the crude oil price crisis. It could take months for the global market to fully comprehend the economic repercussions that it could have across the world, including the cryptocurrency market.
Bitcoin, the dominant cryptocurrency at the moment, is categorised by the Commodity Futures Trading Commission (CFTC) as a financial commodity, similar to FIAT currencies and indices. This means that CFTC recognizes Bitcoin as an asset class which could experience price volatility, influenced by not just the cryptocurrency space, but the wider global financial market as well.
Bitcoin may see increased price amid low oil prices
Market experts have long regarded Bitcoin as an asset class, which is a digital asset that do not rely on physical storage unlike commodities like oil, silver or gold. In reaction to the April’s oil price crisis, Bitcoin volatility has mimicked the traditional stock market price fluctuation and has dipped to its three-month lows, which usually implied significant fluctuations thereafter. Notably, Bitcoin will also be undergoing an event known as “The Halvening”, which could affect the Bitcoin price over the next 9 to 12 months, post-halving. This time, however, Bitcoin’s third halving will be happening on a different set of rules and conditions compared to its previous halving in 2012 and 2016. The global market may be undergoing its worst ever recession since the Great Recession due to numerous factors not experienced before.
The world’s second largest economy, China has seen diminished GDP growth to 6.6% year-on-year in 2018, which is a prelude of a largely negative economic outlook when the next recession happens in 2020 or 2021. Ciaran Hynes, managing partner of Cosimo Ventures, a deep-tech investment firm, mentioned in a January 2019 interview that Bitcoin and other cryptocurrencies would be a strong contender as an alternative to the US dollar if the next recession is caused by the loss of confidence in the US dollar itself. Unfortunately, it is too early to tell given that the market conditions are additionally impacted by force majeure, in this case the coronavirus pandemic which was not experienced since the last World War.
Global wealth transfer to a new asset class
Therefore, if the global recession were to be triggered by the value of FIAT currencies and their purchasing power, it is likely that investors will seek refuge into new asset classes like Bitcoin, which many believe to be the next safe haven asset. Gold has been made a safe haven asset for centuries, historically maintaining its value over time. Based on the past global recessions, gold has served as a form of insurance for the investors, when the event lingers for a while, driving up the gold’s price due to increased demand during the recessive period. However, if the next global recession impact the purchasing power of traditional currencies as seen in the market mayhem cause by the coronavirus, it is possible that investors who understood the benefits of cryptocurrency could shift their asset focus into Bitcoin while those not familiar with the cryptocurrency market will show new interest in the space.
According to an analysis produced by BitMEX cryptocurrency exchange, Bitcoin has traded like a safe haven asset between 2011 to 2013, and the changed economic regime, where the economy and financial markets are set loose, with no significant anchor could serve as the biggest opportunity Bitcoin has seen to cement its place as a safe haven asset, since its creation in 2008.
Crypto as a hedge against an economic meltdown
As a result, many crypto advocates are anticipating the next recession as a driver for Bitcoin and the cryptocurrency market to gain mainstream adoption. Historical records of past recessions have seen investors moving towards safe haven assets that are resistant to severe price fluctuations of the global market. Interestingly, Bitcoin has exhibited characteristics similar to gold in uncertain times like the current market condition.
Furthermore, a decade’s worth of development in the cryptocurrency space has built a diverse set of cryptocurrency derivatives, which offer great opportunities to hedge on Bitcoin and other crypto assets. Evidently, the successful launch of the first regulated Bitcoin options product in Chicago Mercantile Exchange (CME) has illustrated a clear appetite among financial institutions for new forms of hedging instruments such as Bitcoin and other prominent cryptocurrencies. The cryptocurrency derivatives trend is not limited to institutions, as Binance has also seen positive transactions when it launched its derivatives markets, the first cryptocurrency exchange to do so. Thus, Bitcoin, along with other cryptocurrencies, has the capability to take on the role as a hedging instrument, potentially replacing the gold derivative markets in the future.
Skyrocketed Bitcoin Price in Oil-exporting Nations
During the onset of an oil price war, many oil exporting countries are badly hit from the highly price fluctuation of crude oil prices. Coincidentally, numerous oil-rich nations like Argentina, Venezuela and Iran are facing hyperinflation as a result. This has forced citizens from these badly-hit economies to seek an alternative form of currency, in this case Bitcoin, to combat the slipping values of their countries’ national currencies. Leading Peer-to-Peer cryptocurrency marketplace LocalBitcoins has reported a huge spike in Argentina, Chile, Mexico, Venezuela and Iran, causing Bitcoin prices to trade as high as US$35,000 per BTC at one point. The market condition in many of these countries have been aggravated by political turmoil caused by persistent dictatorship and tyrannical regimes. For instance, Venezuela has lost the majority of their revenue-generating sources, except for oil.
It is also worth noting that other oil exporting countries such as Colombia and Nigeria are battling similar hyperinflation issues in their national currencies and Bitcoin is one of the alternative assets that their people turn to. Eventually, Bitcoin will present its growing presence in these affected nations, and prove to the rest of the markets that it could serve as not only a store of value but also as a replacement to the highly unpredictable national FIAT currencies as seen in these oil-rich nations.
Moreover, with the recent decision made by the Trump administration, the approach that the United States is using to combat economic depression is eerily similar to the aforementioned countries. Nevertheless, due to its leading market position, political and technological prowess, the United States may be spared from the issue of hyperinflation in the foreseeable future. But these examples have shown the volatile nature that FIAT currencies are facing when dealt with repercussions caused by geopolitical, commodity and natural disasters over the past several years. It is not to say that Bitcoin could replace these fiat as a global currency, but uncertainties like the above have reminded investors to reconsider their investment and hedging options, and that Bitcoin could exist as a safe form of asset to store in the case of a global economic downturn.
Oil Price Volatilities could be an advantage to Bitcoin
In summary, the drive to draw global investment away from the existing volatile and uncertain financial system is the reason new types of digital assets like Bitcoin exist. Contrary to popular belief, the existence of Bitcoin itself is the answer to the very natural human desire to be free from external control which does not benefit the majority of the people. Oil exporting countries are increasingly facing hyperinflation issues associated with the political instability and influenced by the intergovernmental dispute over various issues like crude oil prices, turning more people towards Bitcoin and other prominent cryptocurrencies as a new type of hedging instrument. Meanwhile, the oil price war has revealed another problem, that physical commodities are susceptible to extreme price swings, attributed by a lack of physical storage and a complicated delivery process. The flaw could be advantageous to virtual commodities like Bitcoin.