While recession fears have receded in recent days, experts are divided on which direction the U.S. economy may be headed. In parallel, the debate over whether Bitcoin and other cryptocurrencies are good hedges during a recession is simmering again, as the space has recently enjoyed institutional acceptance and gained legitimacy among the general public – primarily due to the Securities and Exchange Commission’s approval of spot Bitcoin and Ethereum ETFs this year.
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Bitcoin has long been touted as a hedge against inflation, similar to gold. Moreover, the crypto ecosystem as a whole has recovered this year, but experts are divided on whether cryptocurrencies can really serve as a hedge against a recession.
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Good protection thanks to rarity
While some experts argue that they always view Bitcoin and cryptocurrencies as a hedge, they also acknowledge that these assets come under severe pressure when the market drops – as happened earlier this month. As Morning Brew reported, between August 3 and August 5, the price of Bitcoin fell 20% to below $50,000 – the lowest price since February.
According to Phillip Shoemaker, CEO of Identity.com, the US government will continue to print money, and since Bitcoin is a scarce commodity, it will serve as a very good hedge in such an environment.
“If you hold dollars and bitcoins during a recession, one of them will rise massively after the recession ends – and it won’t be the dollar,” he added.
Rob Chang, CEO of Gryphon Digital Mining, agreed with this assumption, saying that Bitcoin is based on a decentralized network and is therefore protected from the vulnerabilities that typically afflict fiat currencies and stock markets during times of economic downturns.
Furthermore, he said that the asset’s fixed limit of 21 million coins, coupled with increasing global adoption, protects it from the economic pressures placed on more centralized financial systems.
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Good protection with lower interest rates
Another point experts made is that the Federal Reserve would “drastically cut” interest rates if the U.S. entered a recession.
This, in turn, would impact interest rates on money market accounts, certificates of deposit and savings accounts, which investors have been flocking to recently due to the high-yield environment, said Peter Eberle, president and CIO of Castle Funds.
However, he added that as interest rates fall, investors will try to shift those funds into riskier assets, including Bitcoin, which would have a positive impact.
“As interest rates continue to fall and the price of Bitcoin continues to rise, investors will follow this trend and increasing demand will drive the price of Bitcoin higher,” he added.
Not so fast
On the other hand, some experts are quick to point out that Bitcoin – and cryptocurrencies in general – are not only extremely volatile but also speculative assets.
“Bitcoin as a safe haven? Not so fast,” said David Materazzi, CEO of Galileo FX.
According to Materazzi, unlike gold, which has proven itself in recessions, Bitcoin is a risky bet due to its extreme volatility and lack of experience in economic downturns.
“As a speculative asset, it could easily crash when investors seek stability. Since there is no proven performance in such scenarios, relying on Bitcoin as a hedge is more of a gamble than a sensible strategy,” he added.
Sometime
In the long run, some experts argue, Bitcoin will serve as a hedge. Currently, some also perceive it as “a kind of tech stock” that experiences short-term fluctuations on the way to new all-time highs, according to Carter Feldman, founder of QED Protocol.
“Bitcoin has consistently outperformed gold over the past decade and is getting stronger every day,” he said, adding that it will continue to outperform gold over the next decade.
Several experts have repeatedly stressed this – most notably Zach Pandl, head of research at Grayscale, who argued that Bitcoin could take a hit in the event of a US recession, albeit a smaller one than in the past.
“Bitcoin is a risky asset with a positive correlation to stocks, and its price could fall in a recession – as it did in early 2020 with the outbreak of the COVID-19 pandemic,” Pandl recently told GOBankingRates.
In turn, he said the best advice for most investors would be to buy and hold a diversified portfolio of assets and avoid market timing.
What about other cryptocurrencies?
In addition to Bitcoin, other cryptocurrencies such as Ethereum could also offer hedging opportunities, but they carry their own risks related to market fluctuations and the success of the platforms based on them, according to Ronen Cojocaru, CEO of 8081.
In addition, stablecoins such as Tether and USD Coin offer a safer option as they maintain stable values pegged to fiat currencies. However, they lack the growth potential of Bitcoin and Ethereum, making them more suitable for capital preservation than profit generation, Cojocaru said.
And with altcoins in general, the risk is even higher, as their smaller market capitalization, lower liquidity, and speculative nature make them unreliable as a hedge during a recession.
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This article originally appeared on GOBankingRates.com: Are Bitcoin and other cryptocurrencies a good hedge during a recession? Expert opinion
