Economic Challenges Can’t Keep Crypto Down

by Jurica Dujmovic
By Jurica Dujmovic

Today, I want to turn your attention to a significant assertion from U.S. Treasury Secretary Janet Yellen.

During a recent Bloomberg interview, Yellen argued that the U.S. is not heading toward a recession, despite the evidence of economic slowdown. She acknowledged the challenges but dismissed them, highlighting the robustness of the labor market.

This is the very same Yellen that claimed inflation is “transitory.” So, please excuse me if I don’t jump for joy like the crypto markets did on the day of her announcement.

Rather than taking her words at face value, I’ve decided to run a small investigation of my own: Is Yellen's optimism rooted in substantial evidence or is this a tactical maneuver to ease nervous markets? More importantly, how would this affect the crypto market if she’s wrong?

To answer these questions, I’ve gathered the perspectives of three experts who come from the world of finance, economics or cryptocurrency.

Viewpoint No. 1: Young Pham

My journey begins with Young Pham, a financial advisor and investment analyst with Biz Report — a leading source for internet marketing and e-commerce news.

Now, his perceptions are the complete opposite of Yellen's optimistic narrative. According to Pham, several factors seem to point toward an imminent recession.

First, despite aggressive efforts to combat inflation — including consecutive interest rate hikes by the Federal Reserve — core inflation remains stubbornly above the Fed's target. This aggressive tightening, he believes, poses a systemic risk by potentially crippling consumer demand.

Adding fuel to the fire is a declining labor market, evidenced by the U.S. Department of Labor’s recent report, which showed a slowdown for two consecutive months.

And let’s not forget about the real estate market, where home prices are dropping rapidly while mortgage costs are soaring due to high interest rates.

So, this combination of dangerous factors has led Pham to a rather unsettling conclusion: In his perspective, the U.S. is marching, perhaps blindly, toward a significant economic downturn.

With a potential recession looming, Pham believes this could have a sobering impact on the crypto market.

Drawing on historical trends, Pham states that investors, spooked by economic downturns, tend to flee from riskier assets like crypto and stocks during difficult times. Instead, they usually turn to safe havens like bonds and gold.

Considering this, the crypto market may be staring down the barrel of a severe downturn.

In fact, with the market already hemorrhaging due to high interest rates, new historical lows may be on the horizon.

Although larger, more established cryptocurrencies like Bitcoin (BTC, “A-”) and Ethereum (ETH, “B”) may easily weather the storm, they could attract capital away from less popular projects. This liquidity issue could see a number of smaller projects collapsing, much like the recent cases of FTX and Celsius.

Viewpoint No. 2: Tommy Johnson

To obtain a different perspective, I reached out to Tommy Johnson, co-founder of PsyFi — a DeFi marketplace.

While his take echoes some of Pham’s sentiments, it also highlights potential risks lurking in specific sectors.

Now, Johnson believes it's too early to conclude whether a recession is on the horizon. While the market seems optimistic, there are signs of stress.

You see, high interest rates pose duration risks, especially for industries that rely on short-term borrowing and long-term lending.

Specifically, Johnson points to unrealized losses in long-duration bonds held by certain companies as an underlying risk. If these companies are forced to realize these losses, the shockwave could be significant.

Next, the commercial real estate sector — still grappling with the impacts of COVID-19 and the shift to remote work — is another area Johnson flags as being particularly vulnerable due to high interest rates.

If a recession does indeed materialize, Johnson suggests that the crypto market could face a steep downturn. Similar to Pham's analysis, Johnson warns that panic selling during a recession could see liquidity dry up and slow capital allocation to a trickle, potentially causing numerous crypto projects to fail.

However, Johnson sees a light at the end of the tunnel for crypto. The key to the crypto industry withstanding a potential economic downturn is resilience.

Crypto projects need to be prepared for a significant contraction in capital and have contingency plans in place. This includes being more conservative with their funds, focusing on their core mission and avoiding the temptation to expand into unexplored territories.

Viewpoint No. 3: Peter Eberle

My last guest is Peter Eberle, president of Castle Funds — an investment firm that has been managing funds invested in Bitcoin and other digital currencies since 2017.

He offers a slightly more optimistic take on the situation, suggesting that a recession before the end of 2024 is unlikely. Especially considering the Fed’s historical aggression in avoiding recessions during presidential election years.

He also points to the 2024 Bitcoin halving event — which will reduce miners' rewards by half — as a potential mitigating factor for the crypto market. This could potentially cause prices to rise if demand remains consistent.

Additionally, despite the gloomy economic backdrop, Eberle highlights that it's important not to lose sight of the recent positive developments in the cryptocurrency market. After all, they continue to show the industry's potential and resilience.

One such development is the recent Bitcoin exchange-traded fund application from BlackRock (BLK), the world's largest asset manager. This step forward represents a significant endorsement of Bitcoin and cryptocurrencies from the traditional financial world.

In the future, this move could attract more institutional investors to the crypto space, potentially providing a buffer against market downturns.

Furthermore, Ripple’s (XRP, “B-”) recent legal victory over the Securities and Exchange Commission — where it was ruled that XRP is not a security — is another cause for celebration.

This landmark decision is a significant win for XRP and could have far-reaching implications for the broader crypto market. It sets a precedent that could shield other cryptocurrencies from similar regulatory issues, helping to stabilize the market in the face of potential economic challenges.

There you have it.

While these wins are worth celebrating, they're just the tip of the iceberg.

The crypto market is a dynamic, ever-evolving landscape, full of potential risks and rewards. And to successfully navigate this environment, you need access to timely, accurate and detailed information.

That's where Weiss Ratings can help. By subscribing to Weiss Ratings, you'll gain access to a wealth of resources designed to help you stay on top of the latest developments in the crypto market. This includes detailed analyses of the latest trends, expert insights and actionable investment strategies.

Weiss Ratings can help you make sense of the complexities of the crypto market and make informed decisions, whether you're a seasoned investor or just starting your crypto journey.

So, why not subscribe today? We can help you stay in the know, seize opportunities as they arise and navigate challenges with confidence.

Remember, knowledge is power. And in the chaotic world of crypto, it's your best defense against uncertainty and your key to unlocking potential rewards.

Stay informed, stay ahead and let's navigate this exciting journey together.

Until next time,

Jurica

About the Contributor

Jurica Dujmović has been a creator, collector and investor in digital art, including the rapidly evolving non-fungible tokens (NFT) space since its inception nearly a decade ago. He’s also passionate about digital currencies and writes about crypto trends, including what’s new in the Weiss Crypto Ratings, in Weiss Crypto Daily. 

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