How Does Crypto Get Affected By Recession?

From dips in prices to widespread layoffs, a recession may leave a severe impact on the crypto market.

In simple terms, recession is a situation that occurs when the domestic output of goods and services dips. It is a phenomenon that every country witnesses but with varied intensity. Whenever the countries are doing well economically, the Gross Domestic Product (GDP), which is the most comprehensive measure of economic activity, will rise. But, if it is the other way round, the GDP will fall. 

A recession depends on various factors such as unemployment, industrial output, income, retail sales, and also the looming macroeconomic factors such as inflation and supply chain. According to the International Monetary Fund (IMF) data, the growth in the economy is expected to drop from 6.1 percent in 2021 to 3.2 percent in 2022 and to 2.9 percent in 2023 due to the economic crisis. Now, when talking about the crypto market, it slipped from its all-time high market cap of $3 trillion to $1 trillion due to the economic downturn. 

Since the start of this year, the global economy has been low due to several macroeconomic factors. It started with the Omicron virus spreading, followed by the war between Ukraine and Russia, and the collapse of the economics of the US and Europe. Significantly, the COVID-19 pandemic in the last year has impacted most businesses and people, indirectly affecting the economy while crashing global markets. With this, inflation has been reaching new highs every month. 

As a result, the Federal Reserve and Central Banks are taking the hawkish route in response to the impending recession. Also, whenever the US President starts discussing a possible recession, the public gets anxious and moves away from the riskier assets, be it stocks, equities, or cryptos. 

During the economic downturn, investors usually show herd behavior. Investors and institutions supporting the projects may either reduce their investments or abandon their undertakings which can impact the crypto markets. Since crypto investments are considered to be of higher risk, investors tend to sell them at the first sign of any volatility or crisis. 

In terms of human capital, recession can also impact the crypto market. With crypto adoption increasing, more projects will open great job opportunities within the space. In times of recession, if a crypto organisation plans to cut costs, it may result in widespread layoffs. 

A recession would form a poor macro environment for global markets, especially for cryptocurrencies. People during a tight financial crisis have less money to spend on essential items, so they may not be able to invest in risky assets like cryptos and equities. As long as the fear of recession continues, crypto will struggle like any other asset varying in the intensity of drop.

However, recessions are a kind of evolutionary bottleneck where weak projects expire and strong projects keep getting stronger. But if people believe that the product is worth their investment despite money being tight, it is certainly indicative of its long-term value. 

(The author is the CEO and co-founder of Mudrex, a global crypto investing company)

Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal.