Will Bitcoin Survive The Next Recession? In-Depth Analysis

At a time of global geopolitical tensions and financial instability, as global adoption of cryptocurrencies increases, an increasingly asked question is: Will Bitcoin survive the next recession?

Although there is no certainty and crypto assets have not yet been tested during major bank failures and recessions, Bitcoin, in particular, currently has all the characteristics to serve as a store of value during recessions and financial crises. Similar to gold, in fact, during a recession and bank failures Bitcoin may tend to perform well, as it has limited quantity, is decentralized, and is relatively decorrelating from traditional financial markets. Of course, one must also consider the magnitude of the financial (and social) crisis because the outcome could vary depending on it.

The genesis of Bitcoin was right back in 2009, following the 2008 financial crisis, which explicitly highlighted some of the inherent problems and vulnerabilities of the banking system. BTC is exactly the opposite of central bank-issued currency: BTC is limited in quantity (21,000,000), has no central authority to govern it, and has all the characteristics to be a perfect store of value (durable, portable, fungible and divisible, scarce, censorship-resistant).

The current financial system's origins are relatively new, dating back to 1971 when the United States definitively abandoned the Gold Standard. Since that time, money has no longer had a 1:1 convertible ratio with a fixed amount of gold, and the system has focused on fiat currencies issued by financial institutions and governments and not backed by a commodity.

So, the inherent problem with fiat currency issued by central banks is that the value of the currency is determined by the authority of the financial institution that issues it, and thus, there is no inherent value in cash. In fact, if you decide to start your own bank and your own currency tomorrow, it will not differ from dollars, euros, or other currencies, but it will have no value because your financial institution is not recognized and authoritative. This easily explains how the hypothesis that banks will fail is not so implausible and remote when we consider all the problems inherent in the traditional financial system and the emergence of potentially revolutionary solutions such as blockchain, cryptocurrencies, and particularly Bitcoin.

Fully understanding the dynamics and issues of the traditional financial system and answering the question of whether cryptocurrencies will go up if banks fail is not easy, but in this educational article of PlasBit, we will try to provide you with a clear and understandable insight to enable you to fully understand the topic.

Causes and Consequences of Bank Failures

Will Bitcoin survive the next recession? First, let's understand why a recession could happen and what the consequences would be. Recessions are not as rare as one may commonly believe. There are numerous case studies that can be analyzed, as well as reasons why they might happen. A full understanding of the possible causes also allows us to understand what the role of cryptocurrencies might be in the event of a bank failure. So, what are the causes of bank failures and recessions?

• Economic Downturns: The global financial system has faced intense recessions or depressions before, affecting the health of banks and, consequently, the financial readiness and freedom of citizens. If a recession is a serious event, a depression is even worse: people spend less on consumer goods, the value of assets (especially the riskier ones) plummets, the unemployment rate rises, and citizens can no longer pay their loans, increasing the rate of default to banks. This causes a cascading effect, as demonstrated in the great crisis of 2008, and banks risk imploding themselves in a kind of complex Ponzi scheme.
• Mismanagement: Central banks, though complex and well-organized organizations, are still administered by human persons. As human beings, it is common to make mistakes of different kinds (accidental, carelessness, intentional, judgment, ..). When serious mistakes are made at the top of banking organizations, however, the effects inexorably spill over to the entire economy and particularly to the lower social classes. It is imperative that sound risk management and error prevention strategies be adopted to avoid major side effects on the entire economy.
• Systemic Risks: The financial system is an interconnected set of markets, institutions, social and political aspects, and much more. The intricate nature of it is particularly exposed to systemic risks, whereby the failure of one institution can trigger a cascade of adverse effects throughout the financial system. It is imperative that some assets be decorrelated with the performance of the fiat financial system, which is precisely why Bitcoin (and gold) can be considered safe haven assets in times of financial instability.

Consequences of Bank Failures

1. Government Intervention: The failure of one or more banks would have ripple effects on various economic systems and institutions. For this reason, usually, when a bank is about to fail it is helped by the government. Generally, financial bailouts are carried out, in which governments provide banks with capital, asset purchases, or debt write-offs so that the bank can survive and improve its health. While this may be helpful in the short term, it incentivizes risky and improper behavior on the part of banks, and makes governments and banks increasingly dependent on each other, further exacerbating the dependency and causal relationship of traditional financial systems.

2. Negative Impact on Taxpayers: As is easy to imagine, government financial bailouts to banks cause a negative effect on citizens. Allocating part of public finances for bank bailouts, in fact, literally means taking citizens' money paid through taxes and entrusting it to private, centralized institutions. So, people also work to pay and bail out large financial institutions through their own taxes. Furthermore, the redistribution of wealth from taxpayers to financial institutions can exacerbate income inequality and erode public trust in the fairness of the economic system.

3. Debt and Inflation: To offer financial bailouts to banks, the government in most cases uses debt. Government debt creation means printing more money and, as a result, increasing inflation. So while it may help banks survive, using citizens' money paid for through taxes, it also contributes to higher inflation and thus reduces people's ability to spend. This has a twofold negative effect for tax payers: They see their money flowing into private institutions, and they see the cost of living rise (more money in circulation, less value per coin). So, quantitative easing and low-interest-rate policies may fuel inflationary pressures over the medium to long term.

Government Responses to Bank Failures

1. Bailouts: Governments provide emergency financial bailouts for troubled banks, providing them with various types of assistance, ranging from direct capital injections and asset purchases to guarantees on bank liabilities. While bailouts can mitigate immediate risks to financial stability, they may also perpetuate moral hazard by shielding banks from the consequences of their risky behavior.

2. Monetary Stimulus: To stimulate economic recovery, large central banks seek to stimulate the economy through capital injections and facilitated access to credit. This means that interest rates could fall, lowering the cost of borrowing money and providing an incentive for banks and citizens to borrow money. This is a key mechanism of the quantitative easing system, where banks print money in debt, increasing the overall amount of money and consequently exacerbating inflation. Indeed, while monetary stimulus can provide short-term relief, it may also contribute to inflationary pressures and asset price bubbles over the long term.

3. Regulatory Reforms: Often, after a major financial crisis, a new regulatory plan is imposed to try to prevent the same issues from recurring. This is useful in limiting banks' misconduct or risky behavior, and in implementing healthier and more effective risk management strategies. In this way, an attempt is made to reduce systematic risk and the cascading effect given by the correlation of various financial sectors and markets. Transparency and standardization of management practices is promoted, increasing supervision and controls over institutions. But this is often not enough.

After delving into the intricate causes and far-reaching consequences of bank failures and the multifaceted responses of governments and central banks, we can now gain a deeper understanding of the dynamics of financial crises and their potential implications for cryptocurrency markets.

Bitcoin as a Safe Haven

Although we should mention that it is not possible to make predictions because cryptocurrencies have not yet faced a major period of global economic crisis, we can make some observations about Bitcoin in particular, which is the cryptocurrency with the most potentiality to serve as an effective store of value during a banking and economic crisis.

During periods of financial instability, generally, investors sell their riskier assets, such as stocks (and probably altcoin and memecoins), to invest in safer assets, such as bonds, commodities (gold, silver, ..), real estate market,. Nevertheless, the favorite asset for this financial situation has historically been gold, with its intrinsic value, its scarcity, and its role as a store of wealth.

What about Bitcoin?

Bitcoin could be Gold's Competitor as a Safe Haven

Safe haven assets are characterized by certain key attributes that make them resilient in times of crisis:

Scarcity

Safe haven assets are characterized by having limited quantity and availability. This makes them perfect for surviving and thriving in times of high inflation pressure, which, on the contrary, decreases the value of fiat currencies, which have unlimited supply. So, safe haven assets are perfect for acting as hedges against the devaluation of fiat currencies.

Diversification

In order to have a safer reserve of assets in case of financial collapses and economic crises, one must invest in assets that are decorelated from traditional financial markets. In this context, gold has been the main store of value for millennia, but Bitcoin is also gradually decorrelating from financial markets and can take on this function. Generally, commodities are the assets that perform best (or less badly) during recessions, but only gold (and perhaps Bitcoin?) has so far had positive performances even during these phases.

Liquidity

Safe haven assets are easily convertible into cash or other assets without significant price slippage, ensuring their utility as a means of preserving capital and accessing liquidity during times of crisis.

Bitcoin, often referred to as "digital gold," shares many of these attributes with traditional safe haven assets, making it an increasingly popular choice among investors seeking alternative stores of value.

Bitcoin's Attributes as a Safe Haven Hedge

1. Limited Supply: The limited amount of creatable Bitcoins (21,000,000) makes this asset perfect for being considered a safe haven asset. In contrast to fiat currencies, which have unlimited quantity and depend on centralized enters, Bitcoin has limited quantity and is immune to the effects of fiat currency inflation.
2. Decentralization: The decentralized nature of the blockchain makes Bitcoin's system more robust and resilient than the centralized system of a banking institution. Rather than relying on a single point of control, like banks, Bitcoin relies on a decentralized network of nodes, making it more immune to manipulation and network blockages.
3. Censorship Resistance: Financial freedom should be a necessary condition for all people to live worthwhile and freely. Every person should have full ownership of his or her assets and should not rely on the intermediation of a central entity for his or her financial movements. And this is precisely what Bitcoin does, making people free to operate independently without having to compulsorily interface with banking intermediaries, who on the contrary can freeze or seize assets at will.

Comparative Analysis: Bitcoin vs. Gold

Now, it is proper to make a comparative analysis between Bitcoin and gold to understand their differences and similarities.

Transportability

• Gold: Transporting gold across borders or long distances can be logistically challenging and may incur significant costs and the risk of theft. Physical gold is subject to import/export regulations and customs duties, further complicating cross-border transactions.
• Bitcoin: It can be transferred instantaneously and securely across borders, facilitating frictionless transactions and enabling individuals excluded from traditional banking systems access to financial services.

Divisibility:

• Gold: While gold can be divided into smaller units, such as ounces or grams, its divisibility is limited by its physical form. Subdividing gold beyond a certain point becomes impractical or even impossible without specialized equipment.
• Bitcoin: Bitcoin is highly divisible to eight decimal places (known as satoshis). This allows for microtransactions, enabling users to transfer very small amounts of value with precision. The high divisibility of Bitcoin enhances its utility as a medium of exchange and store of value, especially in the digital economy.

Fungibility:

• Gold: While gold bars and coins are generally fungible, individual pieces may have unique characteristics or markings that affect their value. Additionally, the history of a particular gold item (such as involvement in illegal activities) can affect its acceptability in transactions.
• Bitcoin: Bitcoin is inherently fungible, meaning that each unit is identical to every other unit. This fungibility ensures that all bitcoins are interchangeable, facilitating seamless transactions and enhancing its utility as a medium of exchange.

Storage:

• Gold: Storing physical gold safely requires secure facilities such as vaults or safes, which may incur storage fees. There's also the risk of theft or loss, necessitating additional security measures. Moreover, storing large quantities of gold can be logistically challenging and may require significant space.
• Bitcoin: Bitcoin storage primarily involves digital wallets, which can range from software wallets on personal devices to hardware wallets for added security. Digital storage eliminates the need for physical space and mitigates risks associated with theft or loss of physical assets. However, securing one's private keys is crucial to prevent unauthorized access to bitcoins.

Durability:

• Gold: Gold is known for its durability and resistance to corrosion, making it a reliable store of value over time. However, physical gold items can still be damaged, scratched, or tarnished, which may affect their aesthetic appeal or resale value.
• Bitcoin: Bitcoin's blockchain technology ensures the integrity and immutability of transactions, making it highly durable in a digital sense. As long as the Bitcoin network continues to operate, transactions and ownership records remain secure. However, the value of Bitcoin can be influenced by factors such as market demand, regulatory changes, and technological developments.

Government Policy Influence:

• Gold: Government policies such as interest rates, inflation, and monetary policies can influence the price of gold. For example, an accommodative monetary policy that increases liquidity in the financial system might drive up demand for gold as a safe haven against inflation.
• Bitcoin: Since Bitcoin is decentralized and not subject to control by a central authority, it is less influenced by government policies compared to gold. However, regulatory changes and government decisions regarding cryptocurrency regulation can impact the price and adoption of Bitcoin.

Adoption and Acceptance:

• Gold: Gold has been accepted as a form of payment and store of value for thousands of years and is widely recognized and used worldwide. However, the direct use of gold as a medium of exchange is limited by its physical nature and the need for conversion into fiat currency for daily transactions.
• Bitcoin: Bitcoin is a relatively new technology, and its adoption as a form of payment is still in development. However, many businesses and institutions accepting Bitcoin as payment are gradually increasing. Additionally, Bitcoin is seen as an alternative to fiat currencies and can be used for peer-to-peer transactions without intermediaries.

In summary, both Bitcoin and gold have distinct roles as stores of value and investments. While gold has a long history of acceptance and use as a safe haven, Bitcoin offers unique features such as decentralization and ease of transfer, making it an attractive option for diversifying an investment portfolio. By juxtaposing Bitcoin's attributes with those of traditional safe haven assets like gold, investors can evaluate its suitability as a store of value and hedging instrument in their portfolios. In the subsequent section, we delve into a case study of the 2008 global financial crisis, examining the catalysts that precipitated the crisis, the government responses deployed to mitigate its impact, and the emergence of Bitcoin as a response to the failings of traditional financial systems.

Case Study: The 2008 Global Financial Crisis

Both to understand and learn from past history, and to try to hypothesize a possible reaction of Bitcoin to a situation of extreme financial and social instability, we can use the 2008 crisis as a case study and formulate some considerations. The 2008 global financial crisis underscores the fragility of traditional financial systems and the need for alternative forms of value storage and exchange.

Catalysts of the Crisis

1. Subprime Mortgage Crisis: The crisis was triggered by the collapse of the subprime mortgage market in the United States, fueled by reckless lending practices, securitization of subprime mortgages, and inflated housing prices. The subsequent wave of mortgage defaults and foreclosures led to massive losses for financial institutions exposed to mortgage-backed securities.
2. Credit Crunch and Liquidity Freeze: The subprime mortgage meltdown sparked a broader credit crunch and liquidity freeze in global financial markets, as banks became increasingly wary of lending to one another amid rising uncertainty and risk aversion. Interbank lending rates surged, exacerbating liquidity pressures and systemic instability.
3. The Collapse of Lehman Brothers: The bankruptcy of Lehman Brothers, one of the largest investment banks in the world, in September 2008 sent shockwaves throughout the financial system, precipitating a full-blown financial crisis. The failure of Lehman Brothers highlighted the interconnectedness and vulnerability of global financial institutions, triggering panic selling and market turmoil.

Government Responses

1. Bailouts and Stimulus Packages: Governments and central banks around the world intervened aggressively to stabilize financial markets and prevent a complete meltdown of the global financial system. Bailout packages were implemented to rescue troubled banks, while monetary stimulus measures, such as interest rate cuts and quantitative easing, aimed to provide liquidity and support economic recovery.
2. Regulatory Reforms: In the aftermath of the crisis, policymakers implemented regulatory reforms aimed at strengthening oversight of the financial sector and reducing systemic risks. Measures such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States introduced stricter regulations on financial institutions and enhanced consumer protections.
3. Debt Expansion and Monetary Policy: The response to the crisis involved significant expansion of government debt and central bank balance sheets, as policymakers sought to inject liquidity into the financial system and stimulate economic growth. However, these expansionary policies raised concerns about long-term fiscal sustainability and the potential for inflationary pressures.

Emergence of Bitcoin

In 2009, Bitcoin emerged as a radical alternative to traditional financial systems. Introduced in a whitepaper by the pseudonymous Satoshi Nakamoto, Bitcoin was envisioned as a decentralized peer-to-peer electronic cash system, immune to the whims of central banks and resistant to censorship and control.

The timing of Bitcoin's emergence was not coincidental. The crisis exposed the vulnerabilities of centralized financial institutions and underscored the need for a trustless, transparent, and resilient alternative. Bitcoin's decentralized architecture, limited supply, and censorship resistance resonated with individuals disillusioned by the failures of traditional financial systems, spurring its adoption as a store of value and medium of exchange.

In the subsequent years, Bitcoin's adoption has grown exponentially, with an ecosystem of users, developers, and businesses embracing its principles of financial sovereignty and decentralization. While its journey has been marked by volatility and regulatory challenges, Bitcoin continues to thrive as a testament to the resilience of decentralized technologies and the human desire for financial autonomy in an increasingly interconnected world.

So, Will Bitcoin survive the next recession? Bitcoin has all the characteristics to perform well during a period of financial instability and recession, similar to gold and some other commodities. In contrast, altcoins and, in particular, memecoins, similar to stocks, are considered high-risk assets and would probably be the first to be sold during a period of intense financial crisis.

Will Bitcoin Survive the Next Recession? PlasBit Vision

If you don't know yet, at PlasBit, our mission is to provide our community with the tools and information they need to achieve financial freedom with security and peace of mind. Unfortunately, from our analysis and research, we are quite convinced that the traditional financial system is inherently sick and compromised. Over the years, people's purchasing power and financial freedom have declined, making everyone more and more a slave to large financial institutions, which print money at will. We believe that cryptocurrencies, and in particular Bitcoin, can provide a way to take back our financial freedom and make us autonomous from traditional centralized financial institutions. As you can see, the value of gold is rising ultimately, as is the value of Bitcoin. The world is increasingly fraught with geopolitical, social, and economic tensions, and the dollar is increasingly losing its centrality in the global financial system. Until 1971, the Gold Standard financial system was in place. Until now, we have been dependent on fiat currencies and central banks. Has the time come to take back our financial freedom through Bitcoin and its unique features? Will Bitcoin survive the next recession? Well, if Bitcoin were to follow the gold trend during past financial crises, it is very plausible that its price would endure or increase during a recession. If the banking system were to completely implode and be replaced by Bitcoin, then Cathie Wood's predictions of Bitcoin reaching $3.8 million in 2030 would also be considered pessimistic. Only history will tell.