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Could Cryptocurrency Help Solve An Economic Recession During The Pandemic?

corona and crypto

The 2020 COVID-19 pandemic has brought the world to a standstill. The disease has changed the mindset of our daily lives and how we approach everyday income earnings. Apart from its alarming rising rate that leaves everyone vulnerable to its adverse health effects, thus threatening lives, it has also greatly affected the economy in general.

The global economic down spiral was sparked by a vast number of lay-offs by a lot of employers aiming to balance financial records.  The pandemic took a toll on the year, with businesses falling hard in profits and earnings in the first three months.

According to financial experts, the situation might worsen. Iain Wilson, Advisor to NEM Ventures, the venture capital and investments arm of the NEM blockchain ecosystem, said,

“The consumers’ experience to date of zero/negative interest rates has tended to be from higher asset price inflation (stocks, houses, and government bonds), rather than an explicit negative cost to their savings. With many developed countries failing to normalize rates post the financial crisis, we now potentially face entering a Global recession with minimal room to cut nominal interest rates.”

The crypto world took a hit, but unlike earlier times, it seems to be thriving. This thriving is solely attributed to the Cryptocurrency’s volatile nature:  they can withstand unstable economic conditions. During this pandemic, Bitcoin’s value dropped along with stock exchange markets. However, soon after, it picked up with a 20% increase remaining resilient amidst the crisis. Chances are that cryptocurrencies, Bitcoin to be specific might be pushed to replace the US dollar.

Historically, periods of recessions have always been evolutionary turning points for modern economics: weak projects collapse, strong projects prevail, and hence building resilience for industries. Financial analysts believe that it is time for Cryptocurrencies to take over the financial world.

Resilience to fluctuations

Cryptocurrencies have the ability to store value with a purchasing power resilient to fluctuations of international monetary markets.  A lot of people are accepting the new change to bitcoins with a lot of interest from the ill-acquainted. Crypto serves as a cushion for any economic meltdown and all its insanity that provides a haven asset.

With the looming global economic crisis, cryptocurrencies would benefit owing to a slow-paced GDP worldwide.   A potential global recession with a massive economic downturn makes cryptocurrencies to be a suitable alternative for the dollar.  The US government shut down of local businesses brings an excessive contraction of the dollar supply. This reduces the value of assets due to scarce cash.

Decentralization

The decentralized nature of cryptocurrencies has always been the reason for the comeback after a crash. Investors worldwide collectively control the trends in the crypto world, eliminating recession factors that come with centralized economies.

Currently, banks are out to look for a decentralized working plan that will help during the quarantine. Most of these institutions have embarked on online services but lack established structures that can sustain them.

On the other hand, cryptocurrencies have already established structures that are thriving in the midst of this impending recession. People worldwide can buy goods and access services through the cryptocurrency trading platforms and blockchain-based fintech that are operating fully online.

Financial Digitalization 

Businesses all over the world are now going digital, and it seems that this is the start of a new era for digitalization. Online business platforms have always been there, but this pandemic has brought about significant growth.

Likewise, cryptocurrencies and fintech apps are experiencing growth in numbers. The odds are that even after the pandemic, when every other business will be trying to get back to their feet, cryptocurrency trading will be thriving.

A shift from fiat currency to digital currency will be possible whenever the recession happens. The dollar contraction will make organizations and individuals run to cryptocurrency to cush themselves from massive losses.

Cross-border transactions

In the case of a global recession, cryptocurrencies can act as a global haven for many countries, if not all. Different countries will be hit differently depending on the state of their financial sector. Cryptocurrencies’ ability to be operated across borders will be a good alternative. This will eventually help in cushioning the global economy after the recession.

Consequently, countries will have to come up with regulations that will dictate the working of these digital assets. This popularity will eventually lead to a rise in the value of these coins, and their chances of being a store of value will increase.

Another precautionary measure that can be used for the digital assets to go global is agreement on specific cryptocurrencies that will be used. As it is in the crypto work, Bitcoin can replace the standard US dollar with other trusted cryptocurrencies being used as major currencies.

However, other financial experts think that cryptocurrencies, especially Bitcoin, cannot be a haven after a recession. According to Lars Seier Christensen, Chairman of Concordium, a blockchain fintech company, using bitcoin may come with some consequences.

“While there may be a certain haven effect in bitcoin, it may also suffer as investors adopt a risk-off approach, and other cryptocurrencies without the enthusiastic followers that bitcoin has may be most vulnerable to a risk-off approach.” 

“In general, I think bitcoin is a non-correlated, volatile asset driven by die-hard maximalists and often manipulative, two-way players. Bitcoin movements are close to random, and I think there is little predictive value to be found in the general economic conditions.” 

To answer the question, both approaches can be accurate, but it all depends on whether major stakeholders in the financial world will embrace the cryptocurrencies. Until then, one may not entirely know whether cryptocurrencies will make to be fully adopted the economic mainstream. In conclusion, with the unpredicted turn of events that come with this pandemic, the only truth that stands is:

“Whether Bitcoin performs in a recession will be heavily dependent on the reaction function of Central Banks,” said Iain Wilson, Advisor to NEM Ventures, the venture capital and investments arm of the NEM blockchain ecosystem

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