A US recession could fuel a new cryptocurrency boom and bust

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If the global economic slowdown and uncertainty about the future of US-China trade send the US into recession, it could spur a bull run in cryptocurrencies. But while this shift may provide investors with a temporary safe haven, it is likely to lead many to financial ruin.

Back in the early days of bitcoin, a prophecy took hold that a major crypto surge would accompany the next stock market bust. Far from being an irrelevant artefact, this prediction is tied to other pieces of crypto-folklore (myths that Ramesh Srinivasan explores in Beyond the Valley) that many cryptocurrency believers consider fundamental truths. Most notably, it springs directly from the belief that cryptocurrencies are a solid long-term investment, sure to appreciate over time come hell or high water. Though crypto-enthusiasts disagree about which is the “one true coin”, their shared belief that cryptocurrencies will experience long-term gains helps to unite them (and prop up prices).

What is important about these folk tales is not their accuracy, but that a lot of people believe in them. If someone thinks cryptocurrency prices will rise when markets tank, then the rational thing to do at the first sign of a recession is to load up on their preferred digital coin. When enough people act on this impulse, they can move prices up. Cryptocurrency markets are still relatively small compared to equity markets and, therefore, respond to smaller trading events. This means that a handful of independent actors buying or selling the same coin at around the same time can noticeably affect prices.

History suggests that even a small bump during a major stock market downturn would be enough to rekindle the hype that helped drive the record-breaking run up in prices in 2017. At the time, breathless musings about the technology’s future impact from a hodgepodge of crypto-experts and edgy finance thought leaders helped spread the crypto gospel far and wide. The result was a buying frenzy that culminated in a spectacular crash in the winter of 2017-18. Though it has been comparatively quiet since then, this machine remains oiled and ready to fuel another feedback loop of hype, buying and price increases.

It’s almost certain that a recession-linked crypto-rush would end in a crash. The last bust made clear that gains not linked to adoption by “real world” users do not last. While the underlying digital technology continues to hold promise, it has yet to find a significant user base beyond enthusiastic techies.

A new crash would not just hurt technology nerds and risk-tolerant investors, however; it would also hit inexperienced retail investors. When prices started to tumble in late 2017, the resulting drop wiped billions of dollars off the books. Many of those worst affected were novice investors who had financed their purchases with money they couldn’t afford to lose: hard-won savings or even borrowed capital.

The dire risks they took in 2017 cannot be understood solely in terms of some desire to “own a piece of the future”. People then and now are struggling to respond to the challenges of economic stagnation and insecurity and wondering whether good careers and financial stability are still within reach. By bundling an asset people can buy with pipe dreams about transforming the economy, or liberating users from economic woes, or transforming the economy for the better, cryptocurrency backers offer a misleading glimmer of hope against a bleak backdrop of grinding stagnation.

So regardless of what crypto-enthusiasts and the hype machine say, keep this in mind: if your investment strategy is to learn as you go, then a bull run is the most dangerous time to start buying cryptocurrencies. The writer is a Los Angeles-based cryptocurrency writer. Ramesh Srinivasan, founder of the Digital Cultures Lab, also contributed