Some economists and analysts are predicting that we might be headed into a recession. Whether they are correct or not, astute investors will always look for ways to mitigate risks in case this comes to pass. Some would run to battle-tested assets like gold and treasury bills. However, Bitcoin might also benefit from an economic downturn.
Jurrien Timmer, Director of Global Macro at Fidelity, posted this thesis in his X (Twitter) account. How true is this? Can Bitcoin save us during economic turmoil? Let us find out.
What is a Recession?
A recession happens when there is a general decline in economic activity. This could last for months and even years. This is usually declared when the economy posts negative Gross Domestic Product (GDP) for two consecutive quarters.
The GDP, on the other hand, is a measure of the total value of goods and services produced by the economy.
Indicators of a Recession
A recession is predicted by looking at several indicators.
- An inverted yield curve. This happens when short-term treasury bills (government debts) have higher interest rates than longer-term treasuries. This signifies that investors are losing confidence in the economy, and expect lower future returns.
- Rising inflation. Rising costs for products and services will have a negative effect since it could reduce the demand. A demand reduction will hurt businesses.
- Declining retail sales. Consumer spending is an economic driver. Less consumer spending will also affect businesses.
- Rising unemployment. The lack of job opportunities will also mean less money to spend, which also adds to declining retail sales.
Why is a Recession Still Possible
The traditional market, most especially the tech sector, has seen massive returns this year. This is mostly fueled by the Artificial Intelligence hype. The emergence of AI has been a catalyst to pump semiconductor and chip companies, like Nvidia, to reach higher valuations. But is this enough? Are we missing something?
- Leon Cooperman, a billionaire and former Goldman Sachs executive, believes that we are looking at a possible recession by next year. He believes that the rallies in the tech sector are just fueled by positive sentiments.
- The world’s second-biggest economy is reeling in a real-estate crisis. Whatever happens to China will spill over to the global economy.
- Americans will start to pay for student loans, which will affect consumers’ spending power.
- The inverted yield curve. A recession historically starts a few months after the yield curve un-inverts
- However, US Treasury Secretary Janet Yellen believes instead of a recession, we will have a “soft landing”. This sentiment is shared by JP Morgan and Bank of America.
A Closer Look at Timmer’s View on Bitcoin as a Hedge Against Recession
According to Timmer, “If and when that long-elusive recession finally hits, and the Fed pivots for real, Bitcoin and gold could be viewed as high-powered hedges.” What exactly does he mean by this?
The Fed or the US Federal Reserve, together with its monetary arm, the FOMC, has the power to control the country’s money supply.
One of the Fed’s tools to control inflation is rate hikes. This will limit money circulating in the market by making it expensive to borrow. In effect, this also means lesser capital for business expansions and lesser funds for investment instruments, like stocks and Bitcoin. This will cool the interest rates and the economy as well.
But once a recession rears its ugly head, the Fed will have no choice but to jumpstart the economy by starting the money printers. High interest rates will be gone and there will be more money in circulation. Investors will have more capital to invest in businesses. This will also encourage investments in assets like Bitcoin and stocks.
Timmer also thinks that we might be looking at a $96,000 Bitcoin when this happens. He based his analysis on a regression model.
Should We All Be Buying Bitcoin?
No definite answer to this question. It depends on how the investors view a certain asset class. Bitcoin has indeed been an excellent hedge against inflation since its inception. It has outperformed the S&P 500 and even gold. The table below shows how BTC outran traditional investment instruments.
Even if there is no recession, Bitcoin has historically given greater returns compared to S&P 500 shares and gold. However, we should take note of the theory of diminishing returns – wherein an asset will have lesser percentage returns compared to earlier years.
The Litmus Test for Bitcoin
The last recession happened around 2008. Bitcoin was created by Satoshi Nakamoto in 2009, to protect people from the traditional financial system, which led to the last economic turmoil. If the prediction of another collapse happens, then this will serve as a litmus test.
If and when a recession hits, the Fed can initiate quantitative easing to jumpstart the economy. This will reduce interest rates and increase the money supply. With the increased money supply, investors will start purchasing assets that would probably be at a discount. This could inject fresh money into the Bitcoin market cap.
The last quantitative easing (QE) was done in March 2020, in response to the COVID pandemic. Guess what happened afterward. Bitcoin started its parabolic move to reach all-time highs. Look at the chart below.
Jurrien Timmer is a top executive from one of the largest asset managers in the world. So this alone gives credibility to his thesis that Bitcoin can be used as a hedge against a potential recession. Of course, we looked at the data ourselves and his thesis holds water.
Nobody can predict the future. However, history and data are on Bitcoin’s side. Will history repeat the same pattern? Who knows? But let me ask you a question. Would rather buy just a bit, just in case? Or would you rather just hope that an economic turmoil won’t happen?
The information provided in this article is for informational purposes only and should not be considered financial advice. The article does not offer sufficient information to make investment decisions, nor does it constitute an offer, recommendation, or solicitation to buy or sell any financial instrument.
