Many crypto investors have feared their possible losses given the oncoming global recession and crypto’s inherent volatility as a financial asset.
Disbelief in the power of crypto as a safe investment vehicle has always been rampant in the finance industry.
Nolan Bauerle, research director at Coindesk, estimated that 90% of cryptocurrencies active today won’t survive a market crash. However, those that do will provide returns for early investors.
Bitcoin is the highest-priced cryptocurrency, yet it hasn’t experienced a full-blown recession in its lifetime so far.
What is a recession?
A recession happens when a country faces a negative GDP in back-to-back quarters. This usually results in a rising unemployment rate, lower retail sales, and lower productivity overall. Economists have predicted a recession in the U.S. during the first half of 2023.
Recent world events and crises in many different industries, such as food and oil, exacerbated by the Ukraine-Russia war, have increased the chances of a recession.
Ethereum (ETH) is the second-largest cryptocurrency in the market, primarily used as the chain for top-selling NFT projects. It has also experienced a massive drop in value in the last couple of months, including a record $880 low in the current crypto bear cycle.
Cardano (ADA) and Solana (SOL) haven’t fared any better, dropping in the 85% to 90% ranges from their 2021 peak.
TerraLuna crypto crash
The TerraLuna crypto crash caused a contagion effect of crypto-free fall among the crypto investment markets.
One of the most unfortunate consequences of the Terra Luna crash was the reduction of consumer sentiment regarding crypto, as Terra was considered a top-rated stablecoin.
If Terra could crash, then what stops other cryptocurrencies from doing so?
The thing with the Terra crypto crash was that Terra was an algorithmic stablecoin without customer deposits backing it. Its stable value of $1 was based on its perceived value kept by printing a sister crypto, Luna. When it couldn’t peg to the U.S. dollar, it plummeted into a death spiral that caused it to print worthless luna, thus deepening the death spiral.
The market cap of Terra Luna had dropped from $41 billion to $6.6 million in less than a week, as the initial death spiral caused Terra and even other crypto investors to sell out of fear of losing their assets, causing many of the significant cryptocurrencies to also drop in value.
As of writing, Bitcoin holds half of the entire crypto sector’s value, with another big part being tied to Ethereum and the rest linked to the largest stablecoins.
Which cryptocurrencies will survive the recession?
Identifying which ones have the highest probability of surviving isn’t quickly done. The only cryptocurrency with near-mainstream traction is Bitcoin, with some countries adopting it as a possibility for a decentralized primary currency.
Bitcoin responded to the 2008 global recession with a new way for investors to perform transactions without depending on centralized third parties.
While it gained popularity and has remained the primary cryptocurrency in the world of investing, even Bitcoin hasn’t been immune to the global economic recession.
The crypto market has lost $2.25 trillion in value in the same timeframe.
El Salvador believed in the success of Bitcoin as a way for their economy to thrive. They became the first country to make crypto legal tender, yet the crash caused the country to lose over half its Bitcoin holdings.
Similar to how TerraLuna crashed into oblivion, Bitcoin’s value dropped by 22% at the start of June, prompting investors to sell their assets upon fears of the asset bubble popping.
Most Salvadorans were against the idea of using crypto as economic infrastructure. Economists even fear that El Salvador’s Bitcoin attempt could cause its economy to default.
In the past, however, Bitcoin has remained resilient against bear markets, where it has remained above the estimated price drops, becoming even stronger than ever.
Other cryptocurrencies, altcoins, and especially memecoins will likely not have the same luck. Many of them have dropped 99% in price, essentially dying permanently, as it’ll be impossible for them to rise to their original price again.
Even after the global economic recession, there are chances that newer projects will rise from the crypto ashes.
Ethereum is the highest-valued smart contract platform, the preferred layer-one blockchain ecosystem. Binance Smart Chain (BSC), Solana, and Cardano could also survive the recession by attracting newer users. These cryptocurrencies in particular are primarily used for buying NFTs.
These cryptocurrencies are heavily linked with the NFT marketplace, which is growing in popularity despite the shortcomings of cryptocurrencies.
Main takeaways
To summarize everything better, here are the main takeaways of cryptocurrency’s survival during a recession:
- Bitcoin, and in lower levels, Ethereum, Binance Smart Chain, Solana, and Cardano, could survive a recession by attracting newer users and innovating features.
- The cryptocurrency market is highly susceptible to global recessions and financial contagion: the fall of many cryptocurrencies will cause other cryptocurrencies to drop in value.
- Customer sentiment is essential to keep high for cryptocurrencies to maintain their price: the lower the public’s trust in crypto, the lower their willingness to invest in them.
Final words about cryptocurrency investment during a recession
An oft-repeated rule of investing is that you should never invest money you’re not willing to lose. Many amateur crypto investors spent more money than they could’ve spent, or even their savings, only to be disappointed due to the volatility of crypto.
Cryptocurrency is at an all-time low due to the incoming global recession and the frequent price crashes of many of its top-tier stablecoins.
However, many of these stablecoins might be resilient in the face of recession. By attracting attention to their features and utilities, they’d be able to retain some of their value and rise higher once a bullish trend arises.
Check out our other guides on What are NFTs to learn more about how you can use crypto to invest in NFTs successfully.
