Signs of an impending US recession are getting stronger at the moment. These are coupled with massive layoffs in tech and finance sectors that are projected to eventually trickle down to other industries. How will cryptos play in these scenarios?
An Expert Analysis of the Impending US Recession
The Federal Reserve is facing a challenging situation that could lead to a recession. According to an article in Fortune, which was written by Emeritus Professor of Finance Murray Sabrin, the latest CPI data shows that prices rose 6% in February 2023 on a year-on-year basis. The number is well above the new Fed funds target rate of 5%.
The article suggests that the Fed could increase its funds rate above the inflation rate to break the back of inflation. However, the Fed faces additional concerns, such as the collapse of banks as well as the need to ensure financial stability when banks fail.
One reliable predictor of an upcoming economic downturn is the occurrence of an inverted yield curve, which is observed when the interest rates on long-term bonds fall below those of short-term bonds. This phenomenon was noted in October 2022, and historically, a recession tends to follow within a year. Compounding the challenge is the Federal Reserve’s predicament, whereby a surge in inflation leads to expectations that may require significant interest rate hikes to dampen the demand for loans and subsequently reduce prices.
As the financial sector and high-tech industries benefited from the Fed’s easy money policies since the Great Recession of 2008, they have become vulnerable to a sudden reversal of fortunes in the event of an economic downturn. Layoffs in these sectors could result in a ripple effect that could impact other industries, leading to a broader economic slowdown.
As of late, Goldman Sachs downsized its workforce with 4,000 layoffs. It was subsequently followed by massive layoffs from Meta and Amazon. Sabrin thinks that these are forerunners of what’s about to come in the finance and tech sectors, which would eventually produce a chain reaction to other industries.
How Cryptos Will Be Affected
In the aforementioned scenarios, cryptocurrencies could be affected in various ways. With all facts considered, we expect polarizing outcomes based on investors’ behavior.
One potential impact could be a flight to safety as investors seek to protect their assets from the turmoil in traditional markets. Historically, during times of economic uncertainty, investors have turned to safe-haven assets such as gold and government bonds. However, in recent years, some investors have also turned to cryptocurrencies as alternative safe-haven assets because of their better accessibility and trading potential.
Another potential impact could be a decline in demand for cryptocurrencies as investors and traders become more risk-averse, especially at these times when we are still fresh from the FTX fiasco and other scandals that recently rocked the crypto landscape. During an economic downturn, investors may become more cautious and less willing to take on risk, which could result in a decline in demand for cryptocurrencies. Moreover, with increased layoffs, consumers may have less disposable income to invest in cryptocurrencies, which could also impact demand.
On the other hand, some analysts argue that cryptocurrencies could be insulated from the impact of an economic downturn. For example, some argue that cryptocurrencies are not directly tied to traditional markets and therefore may not be as susceptible to the same economic forces. Additionally, cryptocurrencies are decentralized and not subject to government or central bank control, which could make them an attractive option for investors seeking to protect their assets from government intervention.
Final Thoughts
Ultimately, the impact of an economic downturn on cryptocurrencies is uncertain and could vary depending on a variety of factors. However, it is clear that the current economic situation warrants careful attention from investors and traders in the cryptocurrency market.