A Debt-Fuelled Economic Crisis & Bitcoin: What to Expect?
It’s hard to shake the fact that bitcoin (BTC)’s ascent from one fresh all-time high to another in recent months has taken place amid a backdrop of a struggling global economy. The United States’ GDP infamously tanked by a record 32.9% in Q2 2020 and fell by 3.5% across 2020 as a whole, while the International Monetary Fund (IMF) projected in June that the global economy would shrink by nearly 5% across the same period.
These are somber figures, yet some economists are suggesting that things could get even worse. Economists at the IMF recently warned that public and private debt — which were already rising in 2019 — could reach tipping point as a result of the COVID-19 pandemic, crippling the global economy to the point where it can’t properly recover.
Meanwhile, the US might approve their new USD 1.9trn coronavirus relief package in the coming days.
Economists and analysts speaking to Cryptonews.com largely agree with this assessment, even if they disagree on the timeline involved in any debt- and coronavirus-fuelled economic crisis. And while some suggest that commodities such as gold and silver may benefit from any acute crisis, others claim that the bitcoin and cryptoasset markets will suffer, as people and businesses rush for liquidity (i.e. cash), as we already saw during a major market crash in March 2020.
Probabilities, not certainties
Most economic and financial experts appear to agree that some kind of debt-driven slump is approaching, although they tend to disagree on whether this is an inevitability or not.
“I think the crisis is inevitable and coming in the next [few] years,” said Michaël van de Poppe, a cryptocurrency trader and analyst.
“Overall private and public debt are going through the ceiling, while real estate and equity markets are accelerating fast and people are jumping around in euphoric emotions thinking that it will only go up even more. But, then the [US Treasury] yields are crawling upwards,” he added.
Yields on 10-year US Treasury bonds, which is considered to be a safe investment, revisited its one-year high of 1.6% this week, while Goldman Sachs estimates it might hit 1.9% this year as they “believe strong economic data will lead yields to resume their upward trajectory in the coming quarters.”
However, Société Genérale’s Albert Edwards wrote in a note, “the risk is growing that with so many bubbles blown by the [Federal Reserve] something will burst soon.”
However, for economist and author Peter Earle of the American Institute for Economic Research (AIER), a looming debt- and spending-fuelled crisis isn’t completely unavoidable.
“In every moment economic, financial market, and social circumstances change, and thus the likelihood of a downturn changes. Even if all the economic ‘stars’ were aligned in a way that made a crisis, recession, or depression likely within a few months – whatever that means – a single Treasury policy change, Federal Reserve program, or some other influence could and probably would radically change the predicted scenario,” he told Cryptonews.com.
That said, Earle acknowledges that the US and wider international economy is exhibiting many disconcerting signs.
“The huge expansion of the US money supply in March and April of 2020 has had a highly stimulative effect in financial and asset prices […] There’s also an uncomfortable persistence in unemployment rates owing to the lockdowns. So clearly the economy is very hot in some ways and lukewarm in others,” he added.
Predicting when such factors will drag a struggling global economy into a full-blown crisis is hard, if not impossible, to predict. Though Michaël van de Poppe estimates it will happen sooner rather than later.
“I don’t assume we’ll be having the crisis this year, but I’m assuming it will start in 2022 and/or 2023 through which bitcoin will also top out in those years,” he said.
For Peter Cardillo, Chief Market Economist at Spartan Capital Securities, the usual suspects will benefit from a debt-driven economic downturn.
“Going forward I believe that we will have a debt problem which will take the wind out of the stock market, [while] traditional stores of value such as gold and silver will appreciate substantially,” he told Cryptonews.com.
When it comes to cryptocurrencies, Cardillo — like many other economists — says they won’t play a significant role as safe-havens, and that their recent rise has much more to do with pure speculation (than finding new stores of value).
“I am not in favor in crypto markets although there will be a place for them, however, I do not believe that they will replace paper currencies nor gold as a true hedge and store of value,” he added.
Economists and analysts who have more sympathy for bitcoin and crypto, however, take more of a nuanced view.
For Peter Earle, bitcoin could become a genuine safe haven if one or more of the following three conditions were met:
- “a sovereign debt crisis: for example, if the US found itself unwilling or unable to pay interest on the USD 28trn in bonds we have outstanding”
- “if the US dollar were to take a severe beating in the foreign exchange market”
- “if a severe bout of inflation broke out which the Federal Reserve proved unable to arrest, leading to plummeting purchasing power of the US dollar.”
Without meeting such conditions, we’re more likely to see bitcoin and cryptoassets suffer along similar lines to stocks in the event of a debt crisis.
“In the first stage of the crisis, people seek to run for liquidity and as that run will be happening across markets, everything corrects heavily […] this could be the top of the bitcoin cycle and causing a crash of 60%-80% on the bitcoin markets,” said Michaël van de Poppe.
Bitcoin and crypto from the ashes
This is a bleak forecast, yet van de Poppe suspects that the aftermath of the crisis could result in a situation where “the adoption towards decentralized finance and Bitcoin should only accelerate.”
Likewise, even though an unsustainable accumulation of debt will force so-called weak hands to sell off their crypto, van de Poppe says people will “run back towards bitcoin and other assets” after any crisis has run its course.
On the other hand, Peter Earle isn’t so sure that any private and corporate debt crisis would have a significant effect on crypto markets, if only because crypto still remains relatively niche despite its recent rally.
“It’s quite possible that an economic downturn could lead to stresses that induce the liquidation of cryptocurrency positions. [However, b]ecause few private companies have crypto holdings (although that’s changing, considering the example of both Tesla and Microstrategy) the impact on crypto of a loan market or corporate bond event is likely to be small, if any at all.”
In other words, crypto may continue along its own path during a crisis.
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