It's been a bumpy ride these past few days with the increased volatility in the crypto market. Ever since the news of Evergrande filing for Chapter 15 bankruptcy in the US, rumors and speculations have swirling around regarding the direction the economy is headed. If the Chinese government were to let things unfold, it is quite possible that the Chinese economy would go into recession since 30% of its GDP is tied up in real estate. As a result, the rest of the economies around the world would follow suit since many economies are in trade with China and China being the second largest economy in the world. Therefore, I would like to offer my perspective on whether it is likely we might be heading into a recession and if Bitcoin would be considered a recession-resistant asset.
How does a recession work?
In its simplest form, a recession can be defined as a significant, widespread downtrend in economic activity. A recession would constitute a sustained period of weak or negative growth in GDP, followed by an increasing unemployment rate. In the US, two consecutive quarters of negative GDP growth would be considered a recession. Now, many complex factors actually play a role in causing a recession such as inflation, excessive deflation, asset bubble burst, sudden economic shock etc.
Length of recessions since 1945
Since 1945, we have experienced 12 (13 if you count the COVID19 recession) recessions, making the average number of recessions happen once every 6 years. The average length of recessions are currently about 10 months, with some being as long as 18 months and as short as 2 months like in the COVID19 recession. So are we headed to a recession? Nobody knows for certain. At least from the data published by US Bureau of Labor Statistics, we are currently seeing decreasing unemployment rate and CPI, which means we are not moving closer to a recession. However, an event like the Evergrande collapse, if not handled properly, might trigger a contagion effect around the world and cause a recession.
Is Bitcoin recession-resistant?
It's hard to pinpoint if BTC is resistant to the effects of a recession. BTC has never gone through a full-fledged recession since it was created as a response to the Great Recession of 2008. However, during the COVID19 recession that only lasted 2 months, we saw an initial drop of about 40% (from $9K to $5k) and later recovered back to $6.8K towards the end of the COVID19 recession.
BTC price chart from Feb 2020 to April 2020.
As we can see in this limited historical data, BTC is certainly not recession-proof. Bear in mind, the COVID19 recession was followed by one of the largest bull run due to the Feds money-printing. In the event that Evergrande situation turns out to be the worst case scenario and trigger a recession, we will likely see BTC and other cryptos become absolutely decimated. In a recession, money would naturally flow out of volatile assets like cryptos since people have their livelihoods to think about. On the bright side, recessions are pretty short in the grand scheme of things and crypto prices will likely recover before no time.
TLDR; Most statistical metrics actually show that we are moving away from a recession. In an absolute worst-case scenario, Evergrande will likely cause a contagion effect and trigger a recession. However, most recessions don't last long. BTC and other cryptos will likely be destroyed in a recession, but will eventually recover along with the economy.
Edited the TLDR.
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