How will crypto perform in a financial crisis?

Over on our Twitter page yesterday, we asked our community for their thoughts on how cryptocurrencies would perform if there was another financial crisis akin to what we saw in 2008. Bitcoin was infamously released soon after the original crisis and developed a following of those people who saw the current financial system as corrupt and inadequate.

Since 2008, the global economy has seen an extremely slow recovery. Coupled with this, historic trends show that generally there is a financial issue or crisis once every ten years. With this being the case, how cryptocurrencies will perform during such a crisis remains an interesting and unanswered question.

Historic trends

In 1970, we saw an energy crisis which led to the removal of the gold standard. In the late 1970’s, we saw the Latin American debt crisis, which led to neoliberalism being incorporated through the stipulations imposed by the IMF and World Bank for countries receiving bailouts.

The 1980’s didn’t fare too well either. Japan suffered as their asset price bubble burst, and of course there was Black Monday on Wall Street. The 1990’s saw the Asian financial crisis as well as a financial crisis in Russia. This was coupled with the collapse of Long Term Capital Management, a hedge fund with $126 billion worth of assets.

2008 was perhaps the most catastrophic financial crisis of all.

As we enter into 2019, the time is coming for a new one. Of course, this doesn’t necessarily mean that it’s going to happen right now, or indeed any time soon. Whilst history can be a useful tool for predicting trends, it isn’t perfect. With that being said, the financial crisis in Cyprus in 2012–13 led to a direct increase in the price of Bitcoin. As the banks began to refuse to return money to its customers, people looked for an alternative. Bitcoin was one such possibility.

In times of crisis

Traditionally, people who have a large amount of assets can be affected greatly by such financial crises. Therefore, metals such as gold and silver have been viewed as a hedge against financial volatility. As such, Bitcoin has been termed a form of digital gold. Many people argue that it can be viewed as a safe haven against such financial issues. However, Bitcoin, in its short life, has never seen a financial crisis. Therefore, the question of how it will perform should one occur is yet to be seen.

According to our poll, over half the people who responded believe a crisis would affect the whole cryptocurrency space adversely. One of the reasons this may be the case is that new assets, and especially Bitcoin, are extremely volatile and untested in such times. This coupled with uncertainty over how it would perform leads to a vicious cycle of downward pressure. As people lose dollar value from their portfolio, they may sell their crypto to make up for their losses.

The above scenario, for now, is clearly hypothetical. Until there is another financial crisis – which is a matter of when, not if – how Bitcoin will perform is yet to be determined. The results though do show that the majority of people don’t hold much hope for Bitcoin’s performance in a time of crisis.