It doesn’t matter which way you look, the economic outlook is bleak. Many people thought that the coronavirus pandemic was finally over, only to realise we now have to deal with the consequences of putting global industry on hold for nearly two years.
Governments scrambled to keep the global economy alive as the world locked down during the pandemic. The state had to step up and support the citizens and businesses left helpless. Inconceivable sums of money were printed. In fact, a fifth of all dollars in existence were printed in 2020. At the time, no one could focus on anything except getting through the day. Now, with the Russia-Ukraine war putting yet more strain on an already struggling economy, the consequences of the past few years are finally starting to hit hard.
There’s no way this won’t have an impact on the cryptocurrency markets and investors need to understand that they may need to rethink their investment strategies and manage their finances differently in order to insulate themselves from the full impact of an economic downturn.
The economic situation
Many economic commentators now think that the global economy will go through a period of reduced growth and many regional economies could enter recessions.
The Russia-Ukraine war is having a serious impact on growth and has wrought havoc in both global supply chains and energy flows. The International Monetary Fund slashed its outlook for world GDP by half and expects, “higher commodity prices, disruption to supply chains and tighter financial conditions.” Few countries will escape the financial impact from the war, with European countries being hit hardest. The IMF predicts that inflation will continue to increase until the end of 2024.
Since then, the former US Treasury Secretary Lawrence Summers has said “we’re going to have a situation like we did in the 1970s when we perpetuated inflation by not doing enough to contain it.” According to Lawrence, the U.S. economy could “have by every reasonable measure of core inflation running somewhere plus-or-minus 5%”, which is more than when Nixon stepped in with price controls in the 1970s. Summers said that inflation isn’t just going to evaporate overnight, “I don’t think the Fed has the thread right now...we’re just setting the stage for stagflation.” Stagflation might sound like a made-up word but the consequences are very real. It’s a combination of the words “stagnant” and “inflation” and describes an environment in which there is sustained high unemployment, little to no economic growth and high inflation.
But what does this mean for the digital asset markets?
Despite the tens of thousands of different tokens and decentralisation of sectors within the industry, most digital asset prices mimic Bitcoin, the largest cryptocurrency by market cap. Bitcoin used to be negatively correlated with the traditional stock markets. That means that it was unaffected by whether traditional finance was doing well or not. Now, the cryptocurrency industry has changed from niche tokens to a global industry of technology companies, many of which are publicly listed, that are already integrated into the mainstream stock markets.
As a result, it’s not that surprising that crypto prices plunged along with the stock markets. The markets kickstarted the bear market faster than most observers expected, but then the cryptocurrency sector did the rest of the work itself. Overleveraged companies like Celsius, Voyager and BlockFi collapsed amid a wave of liquidations and the shockwaves were felt throughout the market.
Grim as this sounds, there’s a chance that cryptocurrency can weather the oncoming financial storm. The key to understanding this lies in something called the Bitcoin cycle. Bitcoin doesn’t behave randomly, it’s peaks and troughs are actually fairly consistent and follow a 4 year cycle. Here’s how it works. Bitcoin is created by mining, miners are rewarded with a fixed amount of BTC and every four years the amount they receive for this work is reduced by 50% in something called a halving event. In these cycles there is usually a two year period of price increases leading up to the halving, a year of high prices and then a year of low prices. The next halving is set for 2024.
A good way of visualising these cycles is with the Bitcoin rainbow chart. This particular chart shows the price performance of the asset, the stage of the Bitcoin cycle as well as whether it is more attractive for investors to buy or sell. Obviously, these suggestions are just a guide and shouldn’t necessarily interrupt your own investment strategy if you feel it’s working for you.
There’s evidence to suggest that the Bitcoin has stopped a period of freefall and could see either modest gains or a stage of accumulation, which means that it will bounce up and down between a fairly narrow price range. Either way, with the IMF predictions of inflation until 2024, as well as a negative global outlook for the same period, there is still the possibility for the Bitcoin cycle to play out as normal due to the next scheduled halving event. But that doesn’t mean investors should just chuck their funds around with wilful abandon. Times are still tough and we need to remember the real impact of an economic downturn and factor that into a flexible and sustainable approach to investing.
Source: blockchaincenter.net
How will the economic climate affect investors?
Let’s be real for a second. The latest market plunge took out a lot of naive investors that thought they had just bought a ticket for a trip to the moon. But there’s always a chance things could get worse. If the markets take a further, sustained plunge past $20,000, it would mean that investors that bought in the previous cycle could be holding at a loss. Historically many Bitcoin investors have a long-term investment horizon and a strong determination to hold their assets through multiple price cycles. But that determination has never been tested by a global recession and high inflation.
The reality is that many people could be forced to sell their assets, regardless of the price, because their earnings will be worth less but living costs such as food, energy and accommodation are set to skyrocket. To put things into perspective, a recent report from the World Bank stated that global growth is expected to slump to as little as 2.9 percent in 2022.
For the President of the World Bank, David Malpass, it’s hard to stress the consequences of the economic climate enough, “The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid.” This coming winter will be extremely tough as the war in Ukraine disrupts supply chains for basic foodstuffs and Russia’s grip on gas essential for keeping Europe warm during colder months has already seen companies reach out for state support in the middle of summer as reserves dwindle.
A lot of investors that are interested in cryptocurrencies might well have reconciled themselves to the volatility inherent to most digital assets, but did not factor in their daily lives becoming more expensive for several years at the very least. Priorities could shift very quickly from trying to bet on the next altcoin to keeping your family warm through the winter. This could be a trying time for people that didn’t think deeply about their exposure to risk. But those with a good safety net could scoop up digital assets at a bargain price when there’s blood in the streets.
Responsible investing
Now isn’t the time for experiments. It’s the time to have a long, hard look at your finances and then work out what you can afford to invest in tougher financial circumstances than normal, as well as examine whether your risk appetite has changed. Part of having a good investment strategy is the flexibility to adjust your contributions and expectations without undermining the work you’ve put in for your future.
In times like these, you should be minimising your risk and removing yourself from any speculative investments that have the potential to experience high volatility. It’s probably a good idea to prepare yourself for a bit of a shift in mindset as well. If you’re investing and anything close to “I need this to work” pops into your head, you’re investing for the wrong reasons and, in an economic climate like this, it’s only a matter of time before you get burned. Investing should never come from funds you can’t do without in your daily life. In this sense, anything you invest, you should be totally prepared to never see again. With a properly diversified portfolio this shouldn’t be a serious concern.
Like many other things, investing is partly a test of faith. And the next few years could well be a test many investors fail. But before you talk yourself out of investing in digital assets altogether, you should be asking yourself deeper questions about why you invested in the first place. Investing is a long term activity. That means riding the rollercoaster for more than one loop. You either believe in the potential for digital assets to grow, adapt and innovate over decades or you don’t. If you are in the first camp, then a few years of gritting your teeth shouldn’t interrupt your long term plan. If this doesn’t sound like you, then perhaps you’d be better off investing elsewhere.
It’s no secret that the markets have been in better shape and that there are dark days ahead for the global economy. The combination of economic stagnation, a recession and high inflation means that people should be thinking carefully about what they can do to protect their financial security. But these adjustments don’t mean selling your assets before you plan to. There is still potential for the Bitcoin cycle to play out in tandem with the economic situation improving by 2024. Nevertheless, investors should remember that their investment capabilities, horizon and risk appetite could change over the coming months and years. Investing isn’t always a fair-weather activity, but those prepared to weather the storm could come out a lot stronger than they went in.