In Part I of this two part blog series, we examined some of the economic factors that can trigger a recession. We also looked at how some financial assets respond during times of financial crisis. The cryptocurrency market has not yet endured a global recession and many industry experts, investors, and businesses alike are curious how it will react when a financial crisis does strike. While the opinions on this matter create a spectrum of perspectives on how the cryptocurrency market might respond during a global recession, certainty is far from visible. Cryptocurrency assets are the first digital currencies of their kind and have created another asset class; as they have not been tested during an economic recession, it would be imprudent for anyone to claim they know what will happen. Part II of this blog will now focus on some of the traits common to cryptocurrencies that may create a positive or negative reaction to the impending recession.
It’s no surprise to anyone engaged in the cryptocurrency community, but cryptocurrencies are some of the riskiest assets to invest in. Due to the rapidly growing and brand new cryptocurrency market, these assets have seen extremely volatile price and volume swings over the last 3 years. As mentioned in Part I of this blog, volatility and risk are two things that investors and consumers look to avoid when economic downturn strikes. This puts the entire cryptocurrency market in a generally unfavorable classification for “safe haven assets” during a recession. To evaluate the degree of this risk and to identify other major factors, we have broken it down further into coins with larger market caps and market leaders, all other alt coins, and the trending series of stablecoins.
BITCOIN, ETHEREUM, LITECOIN, & OTHER LARGE MARKET CAP COINS
Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Bitcoin Cash (BCH), and other major coins within top 10 market cap have an advantage against the rest of the cryptocurrency market. Specifically, the “Big 3”, – Bitcoin, Ethereum, and Litecoin – have a distinct advantage where their global adoption is seen through utility as an accepted form of payment on websites, modern businesses, and even Automated Teller Machines (ATMs). The ubiquitous acceptance of these Big 3 cryptocurrencies as payment gives them a true value like any other fiat currency. As we know, during a financial crisis, moving your assets to fiat can be a wise move to avoid depreciation in other, riskier asset classes such as stocks. While market capitalization is not the ultimate indicator of consumer adoption, there is a strong correlation. So how does consumer adoption play into the potential reaction a coin may have during a global recession? Simply put, a greater market adoption creates value behind the respective cryptocurrency which reduces the risk that this particular coin will be abandoned when one must re-evaluate their portfolio. Because there is a higher perceived value and lower perceived risk in large market cap coins, especially the Big 3, it makes them better candidates to maintain their value better versus the rest of the market, such as all of the other alternative coins.
One other thing to note about the Bitcoin and Litecoin is that they are traditional cryptocurrencies in the sense that they were created as an alternative, safer form of digital currency. Their purpose was to be used as a true currency in everyday life. The innovation behind these two coins, namely blockchain technology, is what propelled them into the spotlight as some of the first cryptocurrencies, helping them capture the initial market share and thus widespread market adoption. And unlike thousands of other coins that have been created in the last 5 years, Bitcoin and Litecoin were created as autonomous currencies to be free of association to any one business, country, or economy. The decentralized nature of cryptocurrencies like Bitcoin, Litecoin, and other similar coins provides a degree of disconnect between the two way flow of recession causes and effects. For example, if the Chinese economy was to crumble in a financial crisis, there is a strong chance that other currencies would strengthen against the Yuan and ultimately the Yuan would depreciate. Another example that could be applied to a future scenario is during times of an economic recession or financial crisis, some businesses must close permanently or shut down operations temporarily. If a cryptocurrency is issued by a blockchain company, and that company is performing poorly from a financial standpoint during said crisis, the respective coin associated with that blockchain business will most likely suffer along with it. We will examine the differences between major market cap cryptocurrencies and all other alt coins more in next section. Decentralization may play a key role in the success or failure of any coin during a global recession, as these cryptocurrencies were designed to be detached from economies and government control, thereby eliminating a risk factor in times of a financial crisis.
ALL OTHER ALT COINS
Alternate coins, or more commonly known as alt coins, are the riskiest of the riskiest in the cryptocurrency business for several reasons. During the ICO rush of 2017, developers and entrepreneurs were copying the Ethereum code and popping out coins left and right. Whether their intentions to create these coins were purely vested in a business idea, concocted in a get rich scheme, or a hybrid thereof, is something that consumers and investors can judge. Alt coins turned from an incredibly small portion of the market before 2014 (roughly less than 5% of market volume), to a considerable share of market volume in 2017. More importantly though, is that these alt coins saw even more volatility than larger market cap coins! The lower overall trade volume in the alt coin sector opened doors for price manipulation causing unprecedented intraday price swings. This kind of volatility and risk is exactly what savvy, risk averse consumers try to obviate in their portfolio during an economic crisis. Because alt coins are some of the riskiest and most volatile assets, the may perform poorly during a recession and significantly worse than other “safe haven assets”.
Volatility and risk are important factors when evaluating assets during times of financial crisis – just as with other assets however, they are not the only factors to be considered. Alt coins derive their value from innovative fintech. Blockchain technology, decentralization, smart contracts, and transaction privacy are among some of the popular innovative characteristics that have driven value to many alt coins. It has become commonplace for one to find alt coins that provide value through business innovation such as a way to track and sell your renewable energy, rent space on a supercomputer for quantum computing, store your data on a safe and decentralized network, and almost everything in between. Ethereum itself started out as a small cap alternative coin to the major players like Bitcoin and Litecoin in 2014 that provided value through blockchain development on the Ethereum platform, smart contracts, and more. At the time of writing this, November 2018, it has the second largest market cap at roughly $21 Billion. The value that Ethereum provided as a business to consumers, investors, developers, other blockchain businesses, and financiers alike, was crucial to a myriad of technological developments, and helped to catalyze market adoption of the coin on a global scale. If an alt coin provides extreme value through business opportunity or an effective business/consumer solution, market adoption will help to reduce the risk proportionately to the overall market cap growth. As risk aversion is a major determinant to the appreciation or depreciation of an asset during a financial crisis, be sure to evaluate which alt coins provide sufficient value and have the market adoption to withstand a recession’s sprawling economic effects.
Similar to the rise of alt coins, stable coins have seen a rapid growth in the last 2 years. While the same principles of risk that apply to all cryptocurrencies apply to stable coins, this sect of alt coins was designed to combat the volatility attributed to alt coins. There are now dozens of different types of stable coins on the market today after this trend caught the eye of the cryptocurrency community. Let’s take a look at some of the popular characteristics frequently found in stable coins and how that may affect them during economic downturn:
- Managed by an organization, exchange, or business: Similar to alt coins, stable coins are more often than not managed by a business and even more recently an exchange as seen by Gemini. When any asset is managed by an organization versus the people utilizing it, it’s decentralization is diminished. Decentralized assets during a global economic downturn may provide a value point to investors due to a potential degree of exemption from some of the recessionary effects that can directly impact a business or economy.
- Pegged to real fiat currency(ies): The most prominent trait of stable coins is that many of them were designed to be pegged to a fiat currency whether it be the US Dollar, Euro, British Pound, or others. This is one of the main way that stable coins dodge the volatility customary to alt coins. However, in times of financial crisis, the respective pegged fiat in said crisis may be experiencing downward pressure in the global currency market, thus naturally depreciating due to economic factors. Being pegged to a fiat currency can help to eliminate market volatility to a degree, but it will not protect an investor against the fiat depreciating in value due to economic pressures.
- Backed by real assets: In conjunction with being pegged to a fiat currency, many stable coins claim to be backed by real assets to provide assurances to the investors. Maintaining reserves of the pegged currency(ies) and adjusting based on market trades is another primary way stable coins look to reduce volatility as a crypto-asset. Similar to being pegged to a fiat currency or multiple currencies, this does not protect the investor from economic effects during a recession that will directly impact the pegged fiat currency.
So even though the major selling points of stable coins as a cryptocurrency are great for reducing volatility in that asset class, they may provide little protection to the investor from the effects of a recession and how a financial crisis can negatively impact fiat currencies. Not mentioned above but referenced in Part I of this series, was inflation’s impact on an impending recession. If stable coins are pegged to fiat currency(ies) that are experiencing above-normal inflation, how do these stable coins prevent that inflation? If a currency completely loses value (take for instance value of the Venezuelan Bolivar in 2018 or to a lesser degree the Turkish Lira in August of 2018), how would a stable coin pegged to said asset protect a consumer’s vested interest in it from these economic factors? Stable coins are a unique classification of alt coins that provide reduced volatility in the cryptocurrency market, however some of the core characteristics of stable coins might be a double edged sword during times of a global recession or financial crisis.
X8 CURRENCY: A SAFE HAVEN ASSET RATHER THAN A TRADITIONAL STABLE COIN
As an investor during times of a recession, one should be looking for “safe haven assets” as explained in Part I of this series. A safe haven asset can be a specific fiat currency, resource such as gold, or something else depending on the financial crisis itself. Identifying those assets based on a theoretical situation is the hardest part of the equation – something many common investors would not be able to do by themselves. Although X8 currency is a stable cryptocurrency asset that works to fight the volatility and risk found in alt coins, it is too intricately designed just to be labeled as another stable coin. Let’s compare some of the characterics of stable coins mentioned above with those of X8 below:
- Managed by Asset Risk Management-Artificial Intelligence (ARM-AI): X8 currency is managed by an ARM-AI, ioNectar, that is one of the most advanced technologies ever developed when it comes to asset risk management, foreign exchange, and financial trading. With a proven track record since 2016 managing fiat currency in the highest level investment sectors, it was chosen to shepherd X8 currency’s rise to becoming the ultimate crypto safe haven. With an ARM-AI operating the basket of currencies and gold in the X8 basket, it takes out centralized decision making and bias.
- Not pegged to any one individual fiat currency: X8 currency is comprised of the world’s top currencies and gold coins in a basket that is continuously monitored and managed by its ARM-AI. As discussed above, during times of a global recession, certain currencies may appreciate versus others and vice versa. Downward pressure and upward pressure on these currencies will be changing every second dependent upon the factors unique to the financial crisis itself. X8 currency’s ARM-AI will be there every second as well, adjusting the X8 basket to ensure proper management of the portfolio is taken to provide the best results. The unique blend of fiat and gold in the X8 portfolio allows for the ARM-AI to trade into assets that are outperforming the rest of the market, preserving value and fighting inflation in the process.
- Backed by real assets based on the ever-changing basket: The assets in the X8 portfolio are backed by real assets through an exclusive partnerships with banks and financial institutions. Since X8 currency is not pegged to one currency and not backed by one asset, its ARM-AI is able to reduce the risks of asset depreciation through simultaneous trading and asset swapping processes.
The X8 currency ARM-AI’s oversight of the basket of fiat currency and gold is more than just an innovative and decentralized way of managing your investment’s risk and volatility. The ARM-AI governs X8 currency in a manner designed to counteract inflationary effects that are common in today’s global economies. If one economy and the respective currency are experiencing inflationary pressure, the ARM-AI will modify the basket of X8 assets to offset this loss of purchasing power. The ability of the ARM-AI to seamlessly adjust positions based on real time data, economic variables, and global events helps to ensure your investment is safeguarded from inflation and unwanted depreciation.
FINANCIAL INSTRUMENTS & THE IMPENDING RECESSION
We hope after reading both parts of this blog series you are more equipped with knowledge to help protect your assets for when the next global recession or financial crisis happens. Cryptocurrency is one of the newest and fastest growing industries nestled in a niche of fintech innovation, blockchain technology, and financial instruments. Because they are a relatively new asset class and have not lived through turbulent economic times, it is nearly impossible to predict exactly how they will react during the next global recession. By examining prominent factors affecting a recession such as inflation, reviewing how previous asset categories have reacted during times of financial crisis, and seeking to identify “safe haven assets” to invest in, you will be better prepared for the next global recession. As a participant in the cryptocurrency market, you now have an informed perspective on some of the integral characteristics that major cryptocurrencies, alt coins, and stablecoins exhibit and how that may affect their valuation during an economic downturn. You also have received a small background on the ARM-AI governing X8 currency’s asset basket and why X8 currency is regarded as the ultimate crypto safe haven asset. For more information on X8 currency and its ARM-AI, you can view the whitepaper here.