Economic Depression is Coming, and Bitcoin Could be the Best Hedge
Recent debates on whether an economic depression is coming began in early 2018 when the Federal Reserve Bank decided to increase fund rates by 0.25%. The decision came at a time when the unemployment rate was at 4%, and inflation was at 2.4%. Such choices are bound to send ripples in the financial market.
Predicting the global economic future is not always easy. Even professional financial players sometimes get it wrong. If, however, we become adamant about trying to forecast a looming economic depression, we only need to look at several indicators that clearly warn of a possible economic, and possibly an economic recession.
1. Inverted Treasury Yield
An easy way to foretell the economic future is to look at the treasury yield curve. The US treasury bonds are the most reliable on the planet because of the minimal risks they bear. In an inverted Treasury yield curve, the returns on treasury bonds fall, making investors tread cautiously when investing in bonds.
When financial investors tend to be skeptical about the economic future, the demand for long-term fund rates shoots while the yields on interest rates dive. Typically, the returns on short-term yield are low, but sometimes they fluctuate abnormally, making the potential of a recession highly likely.
2. US-China Trade Wars
The International Monetary Fund (IMF) issued its World Economic Outlook in late 2019 and pointed out the continued trade wars between the United States and China might send the global economic space in a downward spiral.
In its financial market statement, the IMF reported that the pronounced trade tensions between the West and the Far East are but one of the potent brews of factors that may eventually send the world to a global financial crisis. Other indicators include the controversial Italian fiscal policy in mid-2019, concerns about new emerging markets, the US government shutdown, and a no-deal Brexit that the IMF warned significantly take a toll on the UK's economy.
When you combine all these factors, the become a catalyzing agent in key organized economies and cause a dwindling interest among investors to splurge cash on highly-priced assets, yet many governments still face huge debts.
3. Coronavirus Global Health Crisis
Fast-forward to the latter months of 2019, and the novel coronavirus started causing health concerns. By March 2020, it was evident that the first signs of an economic recession, one that could match that of the 1929 Great Economic slump, was lurking around the corner. Governments were forced to place their nations under lockdown, forcing many businesses, factories, and plants to shut down, laying off employees, and halting the procurement of new equipment. More than 45 million Americans have filed for unemployment claims in the US as compared to 1.76 million in Japan, 2 million (UK), 10 million (France), and 7.2 million in Canada. Therefore, it is no longer a question of whether we are headed for a global economic recession, but how to best hedge yourself from the already devastating economic downturn.
Why Bitcoin Can Hedge You Against a Global Economic Crisis
In the chaotic economic world that we live in today, experts point out that the crypto market would be an ideal alternative in times of a financial crisis. Many professionals believe the bitcoin, in particular, makes a good and relatively safe digital asset. Below are the reasons why you should consider finding an exchange to buy Bitcoin as a hedge against the economic adversities of the world.
Cryptocurrency Prices Would Rise Alternative to the Dollar
The adoption and growth of cryptocurrency, primarily Bitcoin, as an alternative to the US dollar, will mainly depend on the impact it will have on the traditional financial markets. One of the significant factors that led to the 2007 – 2009 economic crisis was an inadequate supply of the dollar money. That would trigger two scenarios. The first would be a scramble for the already insufficient and scarce cash. There would also be a drastic decline in the market value of all liquid assets like gold.
What would ensue would be a considerable decline of unstable digital assets and an influx of individuals looking for more stable coins tethered to the dollar. People will want to shift from government-issued fiat currencies to leverage on the stable coins that are forecast to reach market premiums during such tough economic times. Eventually, the viability of the weaker dollar-pegged cryptocurrencies will be put to the test, or even suppressed until they reach their downfall.
Bitcoin is a Counter-Cyclical Store of Value
Bitcoin is a relatively new digital asset that is yet to prove its importance as a store of value during this year's global economic recession. However, to hedge their financial interests, investors have often turned to gold as a liquid asset and store of value to counter the dwindling economy. Experts believe that gold and Bitcoin have the same characteristics. By comparing the similarities and drawing conclusions from what is already known about Bitcoin, it is possible to understand the usefulness of Bitcoin in an era of economic downfall.
For instance, gold prices went up by 19% during the 2009 depression, while other assets went down by 35%. That was due to investors' rush for financial safety. Gold maintained its impressive prices even as other equities went down. It is only after the economy became relatively stable that gold lost value and other asset's prices went up.
Looking at the historical behavior of gold, it is rational to conclude that Bitcoin is also a counter-cyclical asset. Even better news; Bitcoin is not correlated to any non-crypto asset and its market performance at the moment. That said, you can invest in Bitcoin and secure your correlated assets such as stocks. According to the Modern Portfolio Theory (MPT), Bitcoin can help you raise your returns on uncorrelated securities with minimal financial risks.
Bitcoin Holdings Offer Payment Transparency
There is an upside to the non-correlation of Bitcoin to other securities and fiat currencies. Because government-issued currencies determine the quality of credit issued under the sovereignty of the fiat system, there are loopholes for financial malpractices and lack of transparency. Cryptocurrencies, such as Bitcoin, have streamlined security protocols when conducting transactions through encrypted ledgers. Consequently, the continuous migration to the crypto market and the adoption of blockchain technology can significantly bring improvements to the transparency of payments involving securities holdings, which was part of the cause of the 2009 economic recession.
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