The chair of the Federal Reserve announced that the Fed is raising interest rates again by 0.75% and re-emphasized that the country is likely to feel some pain before they are done beating inflation back down to their 2% goal. The stock market and crypto markets promptly fell. We have written about how Bitcoin has tracked up and mostly down this year in parallel with the Nasdaq and that phenomena continued after Mr. Powell spoke recently. When interest rates go up and the economy goes down, many companies, and their stocks, suffer. Some go out of business and some survive. This will be the first recession in the crypto era. Which cryptocurrencies will survive the coming recession and which will disappear?
How Can You Predict Crypto Values For a Recession?
CoinTelegraph looked at the odds of there being a recession and discussed how to predict crypto values. They did not come up with any good ways to do this. As they note, the dynamics of assigning value to stock market, individual equities, commodities, foreign currencies, and corporate debt are established and battle-tested through numerous economic downturns and market crashes. There simply are no indicators or metrics for crypto token prices. First of all, the crypto world as it exists today has never seen a full fledged recession. Second, the attitudes and investment perspectives of crypto investors are not the same as a long term investor who used intrinsic stock value as a guide to buying, selling, and holding their investments.
Crypto Token Values and the Crypto Mining Business In a Recession
The stock market is headed down. The Bank of America cut its target price for the S&P 500 by 9% and Goldman Sachs cut theirs by 16%. We can expect Bitcoin and the rest to fall as around the same percent. This will cut into profit margins in the crypto mining business. As we noted when we wrote about crypto mining profit margins, about $13,000 is a reasonable level for the average Bitcoin miner but might be closer to $8,000 per Bitcoin for the largest and most efficient operations. To the extent that miners are unable to profitably create more of a given token this could result in upward pressure (supply and demand) while recession-related forces drive all of them downward. If crypto prices fall badly enough no one will be mining any tokens but the tokens will still exist even as crypto mining businesses cease operations.
Several months ago we asked the question: how stable are stablecoins? We noted that stablecoins that rely on a computer algorithm to maintain stability are vulnerable when prices crash. TerraUSD collapsed in May of 2022 at the same time that Bitcoin fell 25%. We consider algorithmic stablecoins to be at risk as the economy slides into a potentially prolonged recession. Despite reassurances to the contrary, blockchains are susceptible to being hacked. This has happened repeatedly over the years and is another risk when all cryptocurrencies will be weakened in the coming months or years. Weaker tokens will be the most vulnerable to any issues that even temporarily affect their prices in a universally weakened market.
Fundamental Strength of Cryptocurrencies With Fundamental Purposes
We have noted that in a worst case scenario cryptocurrencies like Ethereum (Ether) will have a base value through which they will not fall due to practical uses for their token. Ethereum is the first and largest blockchain platform for supporting NFTs. Cryptocurrencies that are useful in decentralized finance will likewise have support ranges unlike those whose values depend on pure speculation.
Unique Features Protecting Cryptocurrencies During a Recession
Contrary to what the crypto world believed, Bitcoin and the rest have not been protectors of wealth during inflation or as the economy suffers. At least this has been the case at their prior values. However, when a company files for bankruptcy its bondholders take precedence over stockholders who may end up with nothing. Cryptocurrencies in a down market act like currencies (which they are) instead of equities. No matter how far they fall there will always be some value. The trick will be to own a cryptocurrency like the dollar that is going up instead of one like the Argentine peso or Venezuelan Bolivar that habitually loses 99% of its value every decade or less.
Which Cryptocurrencies Will Survive the Coming Recession? – SlideShare Version