The threat of a global recession has caused widespread anxiety in the crypto sector. Several of the most prominent cryptocurrencies are suffering from the broader ripple effects of inflation and uncertainty in the traditional financial markets. The industry is potentially facing the first actual recession since the inception of Bitcoin over a decade ago. Although the prospects look negative in the short term, the decentralized nature of crypto could eventually mean that the industry may not be subject to the same uncertainties and panic as centralized financial markets.
Inflation is on the rise globally. Food and energy prices have hit record highs in several major markets. There is no indication that this trend will stop soon, with the fallout following the Covid-19 pandemic being a significant factor in the rising prices. The general uncertainty, low market confidence and lack of production stemming from the virus spread contributed to the current conditions. More inflation followed in the wake of geopolitical conflicts, and energy prices skyrocketed as gas and oil prices soared.
And indeed, crypto markets have not remained unscathed in this financial debacle. Despite previous “crypto winters” having come and gone since the rise of digital currency in the late 2000s, there is a sentiment that this downcycle is somehow different. And that may be because this is the first significant recession that Bitcoin or any other cryptocurrency — as well as the global crypto community — has been through.
The current climate is incomparable to previous downcycles because of current global market conditions. Fear is amplified because of the unfamiliarity of the situation, creating an environment of uncertainty. Unprecedented price drops across the board are evidence of this. Arguably the two most prominent cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH) are currently dramatically down from the all-time highs they reached in 2021.
There is plenty of discourse regarding the recent crypto market downcycle, from speculation about how long the bear market will persist to pessimism on whether the markets will ever return to the highs of late 2021. The effects of the market are being felt by investors and developers across all sectors of the blockchain industry. The often drastic consequences of the recent price drops, including massive losses of capital and significant layoffs by major crypto companies, have led some to believe that this could be the worst period the industry has and will continue to go through.
Bitcoin’s initial introduction followed the last major global financial crisis of 2008. Sometimes called the Great Recession, one of the critical triggering events behind that crisis was the housing bubble bursting, leading to the capitulation of institutions that had been fixtures of global finance for decades. Naturally, the collapse of prominent banks and other Wall Street giants saw public confidence in the traditional finance sector plummet.
The demand for viable alternatives following the failure may have helped accelerate Bitcoin’s development. Satoshi Nakamoto published the original “Bitcoin: A Peer-to-Peer Electronic Cash System” whitepaper shortly after the iconic U.S. investment bank, Lehman Brothers, filed for bankruptcy. The first block on the Bitcoin network, block 0, had embedded “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks.“
This ‘easter egg’ was an early indication that one of the core principles behind crypto was to create a financial system free from outside influences. Cryptocurrencies shouldn’t be subject to the vagary of traditional companies or markets. Despite the uncertainty in the crypto space about the current recession, it’s important to note that crypto’s utility may eventually free it from the traditional market. However, the crypto sector is still in its early stages, and there will likely be further setbacks as it grows.
There are precautions that we can all take to help prepare for the impact of economic downturns. One critical thing is self-auditing. Knowing what you’re spending money on is essential to see if all the expenditure is necessary. Once you’ve got an idea of your outgoings, you can preemptively cut down on unnecessary spending rather than wait until you encounter problems.
Alongside a self-audit, re-evaluating projects you’re currently working on is critical. Pouring resources into a project that isn’t likely to succeed due to market conditions can set your company back in terms of time, capital and reputation. It’s not always necessary to cut projects off completely. There’s always the option of putting them on hold until the environment improves.
It’s also essential to remember that the current situation isn’t permanent. A crypto winter implies that spring will always follow. Everyone involved in the space must have a long-term conviction and brace themselves for the market’s challenges.
Clients may lose faith, especially if they’re new to the space and haven’t experienced a setback like this. It doesn’t help that media coverage of recent events tends to be negative, which can have a massive influence on people. It’s up to us to ensure that we arm people with the correct information to make decisions based on reason rather than fear and uncertainty.
All the indicators show that these are strenuous times for crypto, and naturally, we are seeing increased uncertainty and skepticism. However, as mentioned, crypto markets tend to be cyclical regardless of how bad things may seem at the moment.
For crypto companies, self-assessment is necessary to prepare for further downturns and mitigate the impact of future setbacks. During and following market dips, a company must put itself in the best possible position to deal with setbacks and benefit from upswings.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Sheraz Ahmed is the managing partner of STORM Partners and co-executive director of the Crypto Valley Association.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.