The United States (US) economy this year has seen increasing concerns about a potential recession amid a notable surge in interest rates and market volatility. The current environment, marked by rising interest rates, elevated oil prices, and a stronger dollar, is shifting the prevailing market consensus on the trajectory of US economic growth away from the expectation of a soft landing.
Interestingly, a US recession could potentially have implications for the crypto market. It might spur greater adoption of cryptocurrencies as investors seek alternative assets and potentially reduce the much-delayed approval of crypto-related bills by the US Securities and Exchange Commission (SEC).
A sure recession in 2024?
In the past two weeks alone, the yield on the key US 10-year bond has surged by about 0.5 percentage points, reaching approximately 4.8 percent. This shift is part of a broader trend in the entire interest rate structure.
Since the end of June, the change in yields has been a staggering one percentage point, resulting in higher borrowing costs for companies, more burdensome car loans for households, and noticeable, uneven outflows of deposits from the banking system as investors move funds into money market accounts. Notably, the cost of a 30-year mortgage is on the verge of exceeding 8 percent, further straining an already expensive housing market.
This shift also has international implications, leading to pricier and less reliable financing. For Japan, it complicates the exit from an increasingly unsustainable monetary policy, with potential ramifications for the US.
The sharp increase in yields is driven by the recognition in markets that the Federal Reserve will maintain higher policy rates for an extended period, combined with the necessity to absorb a substantial supply of Treasury bonds due to significant budget deficits.
Adding to this trend are elevated oil prices, driven by robust demand, ongoing production cuts by OPEC+ nations, and heavily depleted inventories. That poses a significant risk of broader inflation across various goods and services.
These developments are challenging for both the economy and the markets as they dampen economic growth and heighten the risk of stagflation. Financial stability concerns arise due to interest rate mismatches within certain banks, the refinancing needs of other participants in the financial sector, and the potential for credit disruptions. While markets are swiftly adapting to higher rates, the real economy is at an earlier stage of adjustment, signaling a potentially rocky road ahead in the coming year.
Good news for the cryptocurrencies
During a recession, trust in traditional financial institutions and government-backed currencies wanes, leading individuals and businesses to seek alternative forms of storing wealth. Cryptocurrencies, being decentralized and not subject to direct control by any single government or entity, present a compelling option in such a scenario. Additionally, the scarcity built into the design of some cryptocurrencies, notably Bitcoin, further enhances their appeal as a hedge against inflation — a common concern during recessions.
Investors might seek refuge in alternative asset classes to hedge against uncertainties and inflation. Cryptocurrencies, with their decentralized nature and potential for high returns, serve as an attractive alternative for such investors.
Meanwhile, the SEC has been reluctant to approve a spot Bitcoin ETF, citing issues such as market manipulation, custody, valuation, and investor protection. The regulator has repeatedly delayed or rejected applications for a spot Bitcoin ETF while approving several futures-based ETFs in October. With a recession, it may prompt the regulatory body to fast-track the approval of crypto-related bills. These new regulations could provide a more stable and secure environment for cryptocurrency transactions, thereby boosting confidence and adoption rates among potential investors and users.
Stablecoins, which are cryptocurrencies pegged to traditional assets like the US dollar, could play a significant role during a recession. These digital assets are designed to maintain a stable value, making them an attractive option for investors looking to preserve their capital during economic turbulence. In a recession, the demand for stablecoins may rise as investors seek to mitigate risk while still participating in the digital economy.
While uncertainty surrounds how exactly a recession will play out for the crypto market, it is clear that such a period could present opportunities. What’s certain is that the crypto market’s resilience will be tested in the face of a recession, as will the theories that propose cryptocurrencies as a hedge against traditional market instability.
