How Would A Recession Affect Cryptocurrency – With global inflation hitting new highs month after month and the Federal Reserve and Central Banks adopting a more dovish tone, the US and global economies are highly vulnerable to an impending recession or eventual stagflation.
If the predictions are correct and the global economy faces another major recession as early as next year, the cryptocurrency and bitcoin markets could see a very different outcome.
How Would A Recession Affect Cryptocurrency
Cryptocurrency markets are moving in step with stocks and bonds like never before. According to Dow Jones market data, the three-month correlation between cryptocurrencies and major US stock indexes hit an all-time high last week.
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A correlation of 1 indicates that the markets move in sequence, while a correlation of 0 indicates that they are uncorrelated. According to IntoTheBlock, a market intelligence tool, the correlation level between stock markets and cryptocurrencies is currently at an all-time high of 0.9.
This means that any macroeconomic headwinds that normally affect stock markets will have the same effect on all digital assets when investors sell in a bear market.
Venture capital and institutional investors fund most blockchain smart contracts and many other cryptocurrency projects. These blockchains are developed and managed by registered companies (many offshore), each with marketing budgets, tokens allocated to teams and foundations, support groups, headquarters, founders, CEOs, CFOs, COOs, and more.
They are essentially private software companies that build decentralized blockchains as a core product/service while adhering to corporate ESG guidelines. Some are more successful than others, but the goal is the same: to provide a decentralized blockchain using smart contracts.
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While some prominent smart chains are decentralized at the blockchain level with a large number of widely distributed nodes, they are otherwise decentralized.
The vast majority are not decentralized at the team/developer level and rely on a small number of individuals and institutions to develop and manage the blockchain. An example is Ethereum, whose development is largely centralized according to the vision of its founder, Vitalik Buterin, who has the right to control the project at will (like the “heavy bomb” of Ethereum). Additionally, there is no community consensus process for approving protocol changes.
Additionally, various aspects of centralization can be seen in the initial coin distribution; government; or at the infrastructure level, for example, rely on central objects such as Infura or AWS cloud services to work/interact with dApps or store a complete transaction history.
One such incident occurred last March with non-custodial wallet provider MetaMask, which was committed to decentralization.
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In behavioral finance, a subfield of behavioral economics, investors exhibit herd behavior when investing, and investors are prone to risky assets in bear markets (Kjelldorff & Keskitalo, Stockholm School of Economics, November 2009).
As a result, during a bear market, institutions that support most blockchain projects may significantly reduce their funding/investment or abandon some projects altogether, which will have a significant impact on the crypto markets.
We saw similar behavior in Internet stocks during the dotcom boom. Many investors wanted to invest in any dotcom startup, regardless of the price. It was easy to attract venture capital, and investment banks that profited handsomely from IPOs fueled speculation and spurred investment in technology. However, during the dotcom crash, institutional investors pulled out, causing many companies to go bankrupt, while others that survived, such as Amazon and Cisco, lost 80% of their market value.
Smart contract blockchains have not yet reached mass adoption. As with early tech stocks, more innovation and development is needed in the DeFi, blockchain gaming, meta universe, on-chain health, on-chain trading, NFT sectors to increase adoption and thus value in the crypto markets. Therefore, this could lead to a boom in crypto markets as more use cases and new innovative applications emerge. If stagflation and economic crises are like the 1970s, it could take years.
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It should be noted that many of these smart contract blocks have enormous potential. An incredible amount of innovation has already been achieved, and in the long term we may see cryptoassets separate from tech stocks as cryptotokens mature and develop their own unique properties.
Yes, Bitcoin, like other cryptocurrencies, is tied to stock exchanges and will likely experience strong selling pressure, but we believe this will be temporary.
In essence, bull markets have many characteristics: things are booming, central banks are engaged, sentiment is good, money is flowing. However, in a bear market, every asset looks “unlucky” in its own way.
Bitcoin will play by its own rules and will recover faster in our opinion. The rationale behind this is simple: Bitcoin is a public good – a decentralized payment network powered by energy rather than human decision-making, where everyone can reconcile ledgers and historical transaction data – the true democratization and decentralization of money.
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Bitcoin is the fastest growing and most secure payment network in the world. By the end of 2021, the volume of transactions has increased by approximately 100% per year over the past 5 years (G. Cipolaro, E. Kochav, NIDIG, January 2022):
People have traded with each other for thousands of years and will continue to trade for thousands more years. The material form of money has changed dramatically over the past 10,000 years, from cattle and cowrie shells to modern electronic currency. As long as humanity exists, commerce will continue, and Bitcoin is the fastest growing alternative form of money, accepted as legal tender in two nation-states despite being only 13 years old.
Lightning Network is a Bitcoin-based payment protocol. It is a decentralized system for instant high-volume micropayments between users. It is probably the best tool to determine the use of Bitcoin as a “payment network” and how actively it is used to pay for real goods and services, not just for “commerce”.
The Bitcoin Lightning Network is growing rapidly, with over 80 million users currently accessing the network, up from 100,000 in August 2021. According to Arcane Research, in the first two months of 2022, the Lightning Network processed more than a million. payments with approximately $45 million in payments, representing a 410% year-over-year increase.
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We can better understand Lightning Network transactions by breaking them down. In the first two months of 2022, about half of the total volume of payments will be made directly by individuals. These payments can be used for a variety of purposes, including remittances to families abroad, borrowing or lending to friends, buying things from neighbors, and more.
20% of payments are goods or services purchased through a payment processor or indirectly using gift cards.
Since most transactions on the Lightning Network reflect payments of real economic value, such as payments for goods and services, the use of Bitcoin as a payment network is proven.
Bitcoin continues to hold the largest share of the crypto market in terms of both market capitalization and number of users.
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Cripo.com reports that in 2022, of the 295 million cryptocurrency users worldwide, about 176 million, or just under 60%, owned Bitcoin, while only about 23 million, or less than 8%, owned Ethereum.
Although Bitcoin’s market capitalization has declined, as evidenced by BTC’s dominance falling below 40% between November and December 2021, this has not affected the number of Bitcoin owners.
According to the report, the number of Bitcoin users grew by 37.5% in the second half of 2021, from 128 million in July to 176 million in December. In contrast, the number of Ethereum users grew by only 1.4% during this period.
While smart contract blockchains like Ethereum have shown significant innovation in DeFi, gaming, and NFT, global adoption will take much longer, while Bitcoin has a proven real-world use case of a secure, reliable payment network. which they use millions. All over the world.
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While smart contract blockchains such as Solana and Ethereum have seen far more transactions than Bitcoin, most of these transactions have little economic value.
For example, mining pools, which are collections of crypto mining systems, distribute chunks of cryptocurrency among themselves, creating thousands of transactions on the blockchain. They have no economic value. Another example is spam, which significantly increases the number of transactions. This is especially true for Ethereum, which supports thousands of tokens on its blockchain. Bloomberg reports that spam accounts for 19% of the total non-economic value of Ethereum.
According to Coinmetrics, 98% of all Cardano transactions are worthless. Elementus Inc., another analytics company, found that 45% of transactions on the Ethereum network consist of uneconomic exchanges such as spam. Coinmetrics subtracted the number of non-economic transactions from the Ethereum blockchain and came up with an actual economic transaction volume of $700 million per day for Ethereum, or $255 billion per year.
Compare that to Bitcoin’s actual annual economic transaction volume of $3 trillion. According to NIDIG research, Bitcoin will process 3.0 tons of payments in 2021, ahead of major card networks such as American Express (1.3 tons) and Discover (0.5 tons). To avoid such distortions