Cryptocurrencies During an Economic Downturn

Whether we like it or not, 2020 will mark the first economic downturn since the 2008 financial crisis and as a result, investors around the world will need to adjust their strategies. At the same time, this is the first time the cryptocurrency market must face a crisis and how it will perform is still under a question mark. Although we cannot give a concrete answer, it will be important to analyze a few parameters to figure out how valuations will fluctuate over the upcoming months.

Volatility – the main concern

Indeed, cryptocurrencies hadn’t face any period of financial struggle, but despite that, we can categorize them based on several different characteristics, to assess any resemblance with any other similar assets. What stands out when it comes to crypto is volatility, which puts them into the category of high-risk assets. As a result, investors are not eager to hold them when the fear starts to grow.

That’s exactly what happened in March when stock markets slumped, and cryptocurrencies followed through. Soon after tensions eased, stocks recovered and so did the crypto market. The correlation had been very high, surprising most of the analysts.

Global market sentiment

When uncertainties rise, the investors’ appetite for risk drops and they look for safe-haven assets to protect their capital. Since cryptocurrencies fluctuate by a wide margin constantly, it’s not the best place to keep your money when economic difficulties start to rise. It is during this period that fake news exaggerates the move on the downside, leading to more selling and thus more pain for the markets.

Unfortunately, that’s how human nature operates and all that we can do is find ways to protect ourselves. The good news, though, is that short-term uncertainties could generate a lot of trading opportunities, both on the upside and the downside. Investors must be able to understand how market sentiment changes and trade accordingly.

Fiat devaluation

To overcome the economic downturn, governments around the world had already embarked on massive stimulus measures and as a result, fiscal deficits and debt-to-GDP ratios will skyrocket. The global debt-to-GDP is already high, meaning the ability to pay it back is limited. The most likely outcome will be to devalue the currencies and although it won’t be good for the people’s purchasing power, it could lead to a rise in cryptocurrency valuations. Exchanging crypto to fiat will be one of the methods to protect against the diminishing purchasing power, alongside buying other financial assets.