Sebastian Sinclair

The US could be headed towards a recession, a potentially unprecedented test for the crypto industry.



Outside of the two-month recession around the Covid pandemic, crypto has never experienced any legitimate economic downturn. The <a href="https://www.stlouisfed.org/on-the-economy/2021/may/mortgage-distress-great-recession" target="_blank" rel="noreferrer noopener">mortgage-fueled</a> “Great Recession” from 2007 to 2009 preceded <a href="https://blockworks.co/news/on-chain-billionaires-buterin-nakamoto" target="_blank" rel="noreferrer noopener">Satoshi Nakomoto</a> launching the Bitcoin network, long before NFTs and Web3.



Predictive models from the New York Federal Reserve point to a <a href="https://www.newyorkfed.org/research/capital_markets/ycfaq#/interactive" target="_blank" rel="noreferrer noopener">68% likelihood</a> of a recession hitting within the next year, a daunting 30% leap from <a href="https://blockworks.co/news/what-a-recession-means-for-crypto" target="_blank" rel="noreferrer noopener">predictions</a> just five months earlier.



The cryptocurrency industry&#8217;s reaction would largely depend on the root cause, duration and severity, according to Rich Rosenblum, CEO of market maker GSR.



“If it&#8217;s a recession driven by a worsening of the banking crisis, it could end up a boon, as crypto is increasingly being seen as a viable alternative to legacy financial systems,” he said. Rosenblum warned that projects would need to focus more on public sales over private deals, as institutional demand may dry up.



If a recession stems from persistent global economic weakness, survival could be challenging for crypto companies, especially those dependent on speculative inflows.&nbsp;



Tokens with real-world impact outside of the industry are likely to be more resilient, Rosenblum said.



<h2 class="wp-block-heading">Recessions are getting shorter</h2>



The good news: The average length of a recession has declined over the centuries.



Granted, the most recent US recession (which went for 18 months) was the longest since the Great Depression — almost 100 years ago, but:



<ul>
<li>From 1854 to 1919, a typical recession lasted 21 quarters, or a bit more than five years, data from the National Bureau of Economic Research <a href="https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions" target="_blank" rel="noreferrer noopener">shows</a>.&nbsp;</li>



<li>Between 1919 and 1945, that average fell to 18 quarters, or four and a half years.&nbsp;</li>



<li>Modern day recessions are estimated to span 10 quarters, just two and a half years.</li>
</ul>



Still, some allocators — like Akshat Vaidya, head of investments at Maelstrom, the debut fund of the family office of BitMEX co-founder Arthur Hayes — aren’t confident that crypto could make it through unscathed.&nbsp;



Vaidya told Blockworks he expects crypto to move just like it did during the 2020 Covid crash, &#8220;implode along with the rest of the world come recession, as liquidity vanishes in the cascade of margin calls.&#8221;



That could still lead to a positive outcome over the long term.&nbsp;After all, bitcoin skyrocketed more than 900% in the quarters following the 2020 recession, jumping from below $7,000 to as high as $69,000. 



&#8220;Not only will high-quality projects survive, but they will thrive in the easy money policies that follow,” he said, adding that investors focused on quality could see an opportunity to be “greedy when others are fearful.&#8221;



<h2 class="wp-block-heading">Bitcoin halvings help crypto practice for recession</h2>



Substantial monetary stimulus worldwide during the pandemic renewed one of Bitcoin’s primary value propositions: Hedging against inflation and currency devaluation.



With this in mind, one optimistic take is that bitcoin — which generally leads crypto markets — has <a href="https://blockworks.co/news/bitcoin-halvings-bull-market" target="_blank" rel="noreferrer noopener">historically operated in four-year cycles</a>, on account of its halvings.



Past performance around halvings may not strictly indicate future results, but predictable changes to bitcoin’s issuance could help crypto investors plan to weather the storm.



&#8220;With each halving event where the new supply of bitcoin is reduced by half; every halving event to date has preceded a significant increase in the bitcoin price as well as a correction to follow,&#8221; Jesse Shrader, CEO at Lightining-focused startup Amboss Technologies, said.



On the other hand, government stimulus has shielded parts of more traditional industries, including leading up to and throughout the pandemic recession.



While stimulus has made the business environment seem more stable, it&#8217;s not clear whether the broader economy could withstand dramatic shocks without intervention.



For startups battling a prolonged recession, profit margins and cash flow remain critical, according to Terrence Yang, managing director at bitcoin financial services firm Swan Bitcoin.



“Can you survive several months or even years of a recession? Now is a good time to evaluate whether you are credibly solving a big, urgent problem with a uniquely valuable solution,” Yang said, adding that&#8217;s something few cryptocurrencies have done.



For investors, Yang said bitcoin’s fundamentals in the long-term remain unchanged, especially over horizons for longer than five years.



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Crypto Has Never Seen a Long Recession — Here’s What Could Happen

Digital assets have sprung to life in the past week, despite ongoing concerns a looming recession may place higher valuations on hold in traditional markets.



<a href="https://blockworks.co/price/btc">Bitcoin</a> is up more than 23% from weekly lows of around $17,100 to $21,350 placing the average holder and mining operations back into the black. Its price is now trading at three-month highs.



The crypto’s clean break above $19,000 on Friday led to a continuation in price action for digital assets across the board. It&#8217;s worth noting the rally is beginning to weaken courtesy of overbought conditions.



<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="1024" height="545" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg" alt="" class="wp-image-44221" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg?w=2048 2048w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Glassnode-bitcoin-price-2-week-1024x545.jpg?w=80 80w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption class="wp-element-caption">Bitcoin 3-week price; Source: Glassnode</figcaption></figure>



“To date, the 2022-23 bear market has spent 179-days below the Realized Price, making it the second-longest duration across the last four bear cycles,” data analytics firm Glassnode said in a <a href="https://insights.glassnode.com/the-week-onchain-week-3-2023/?utm_campaign=woc_03_2023&amp;utm_medium=woc_newsletter&amp;utm_source=email" target="_blank" rel="noreferrer noopener">newsletter</a> on Monday.



Realized price in crypto refers to the value all BTC was bought for divided by the amount in circulation.



There are notable similarities in market strength to 2019’s bear market despite bitcoin having yet to ascend beyond $22,400 for long-term holders (155 days or more) of the asset when viewing in Realized Price, Glassnode said. Breaking above $22.4k would place long-term holders back into profit.



With the crypto now trading at highs not seen since before the collapse of FTX, miners are also experiencing reprieve after suffering from several market routs in 2022.&nbsp;



The recent rally in digital assets has led to outsized gains for <a href="https://blockworks.co/news/crypto-miners-log-stock-price-gains">many miners</a>’ stock valuations, including Hive Blockchain and Marathon Digital which jumped 31% and 37% last week on reports of easing inflation.



A drop below $17,000 could put miners — many of whose stock valuations had plummeted considerably in recent months — back on notice.&nbsp;



<h3 class="wp-block-heading">Investment product inflows and lingering fears of a recession</h3>



Digital asset investment products saw minor inflows totaling $9.2 million last week alongside low trading volumes of around $866 million, digital asset trading group CoinShares said in a report on Monday.



The industry’s price appreciation has resulted in a weekly gain of 13% in assets under management — the largest in 14 months. Ether has also shrugged off eight weeks&#8217; worth of outflows, with an inflow of $5.6 million coming off the back of a favorable shift in trader sentiment, CoinShares said.



An attitude toward risk-on assets, such as crypto, has been guided by a boon in sentiment for traditional equities in recent weeks — also witnessed across Asia-based markets.&nbsp;



Stocks trading in China and Hong Kong <a href="https://www.bloomberg.com/news/articles/2023-01-16/asia-stocks-to-open-mixed-as-new-year-rally-stalls-markets-wrap" target="_blank" rel="noreferrer noopener">closed in the red</a> on Monday following announcements of less than favorable growth in economic activity last year. Crypto has followed suit, with bitcoin stalling near a peak of $21,600 on the day, before falling back to current prices.



The tightly controlled nation’s economy grew just 3% last year, clocking its second-slowest run in almost 50 years. Still, China’s shift away from its COVID-19-zero policy earlier this month has some analysts anticipating a stronger-than-expected recovery this year as the country begins to reopen to the world.&nbsp;



Quarterly and monthly economic data have continued to exceed analyst expectations as the country eyes a recovery, <a href="https://www.cnbc.com/2023/01/17/chinas-earlier-reopening-means-earlier-recovery.html" target="_blank" rel="noreferrer noopener">CNBC reported</a> Tuesday. That could lead to a rebound in Asia-based equities and a chance for increased capital to flow to risk-on assets such as bitcoin, despite a <a href="https://www.bbc.com/news/technology-58678907" target="_blank" rel="noreferrer noopener">heavy ban</a> on digital assets being in place since November 2021.



Fears of a looming recession could put any hope of a stronger return to last year’s pricing for digital assets on hold, with many <a href="https://www.bloomberg.com/news/articles/2023-01-16/chief-executives-and-economists-worry-global-recession-looms-as-davos-begins?leadSource=uverify%20wall" target="_blank" rel="noreferrer noopener">business leaders</a> predicting global growth to slow considerably over the coming 12 months, Bloomberg reported.



Some macro analysts, such as Andy Constan of Damped Spring Macro Research, are skeptical that the Federal Reserve can engineer a hoped for ‘soft landing,’ and avoid a recession. Consequently, Constan is short both stocks and bonds, <a href="https://twitter.com/ForwardGuidance/status/1615349764215951366" target="_blank" rel="noreferrer noopener">he told Blockworks’ Forward Guidance podcast</a> last week.



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Bitcoin Price Rally to $21.5K Takes Pause

Casey Wagner

If the US economy is headed into a recession, risk assets such as crypto and tech equities should buckle up, analysts say.&nbsp;



The New York Federal Reserve’s <a href="https://www.newyorkfed.org/research/capital_markets/ycfaq#/interactive" target="_blank" rel="noreferrer noopener">recession probability model</a> is now predicting a 38% chance that the US will go into a recession in the next 12 months. 



“This understates the real probability which, based on +60 years of history, is now close to 100%,” Nicolas Colas, co-founder of DataTrek Research, said.&nbsp;



The New York Fed uses the difference between 3-month and 10-year Treasury yields to determine their figure. Historically, nearly every single time the New York Fed’s model has called for a chance of recession above 30%, a recession was either already underway or occurred within 12 months, Colas noted. 



“The economy is entering slowdown mode as final third quarter nonfarm productivity data was revised higher and labor costs were significantly revised lower,” Edward Moya, senior market analyst at Oanda, said. “Yield curve inversion deepens and nears a four-decade low which is clearly setting up this economy for a recession that won&#8217;t be a mild one.”



With risk appetite fading, bitcoin and ether continued to trend lower Wednesday, each losing about 1.6% and 3%, respectively. Bitcoin continued to hover below $17,000.&nbsp;



Equities struggled to stay in the green Wednesday as well with the S&amp;P 500 and Nasdaq composite indexes losing 0.2% and 0.5%, respectively.&nbsp;



“Bitcoin has massive resistance at the $17,500 level and that should hold leading up to next week’s FOMC decision,” Moya said. “Long-term crypto bets that are waiting to be placed will require either a bullish fundamental trigger or a capitulation moment that has bitcoin testing a key technical level.”&nbsp;



The Fed is set to release its latest decision next week, and investors will surely want to know how Chair Jerome Powell is thinking about rates in view of a potential economic slowdown. 



As of Wednesday, futures markets were pricing in about a 75% probability that the Fed will opt for a 50 basis point rate hike, which would be a mild decrease from its streak of 75 basis point increases, according to <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html" target="_blank" rel="noreferrer noopener">data</a> from CME Group.



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Economists Predict Recession. Should Crypto Holders Worry?

As global economic outlooks for 2023 continue to call for higher interest rates and slowdowns in economic growth, equities and crypto are heading toward the end of the year deep in the red. 



Bitcoin, which recovered from its sub-$16,000 level early Tuesday, is currently down more than 66% year to date. Ether, similarly, is approaching a 70% decline since January 2022. Equities are also likely to end the year <a href="https://blockworks.co/news/bitcoin-diverges-from-tech-stocks-as-ftx-fallout-continues" target="_blank" rel="noreferrer noopener">solidly lower</a>, with the S&amp;P 500 and Nasdaq Composite indexes currently 17% and 30% lower year to date, respectively.



“Bitcoin could continue to stabilize here if Wall Street rebounds, but that seems unlikely as this bear market for stocks has yet to bottom out,” Edward Moya, senior market analyst at Oanda, said in a note Tuesday. “Bitcoin has support ahead of the $15,500 level but if that does not hold, technical selling could send prices toward the $13,500 region.”&nbsp;



Two-year Treasurys now yield around 0.65% more than ten-year Treasurys, according to data from the St. Louis Federal Reserve. A negative spread has historically been a leading indicator of a recession, analysts note. Every recession from 1955 to 2018 has been preceded by a negative spread between six months and two years before the recession occurred, according to data from YCharts.&nbsp;



The current spread of -0.65% is the widest since 1981, DataTrek Research co-founder Nicolas Colas wrote in a note Tuesday.&nbsp;



“The intellectual underpinning of 10s minus 2s being a recession indicator is that it compares Fed monetary policy (2-years) with the market’s take on the neutral rate of interest (10-years),” Colas said. “A large gap, such as now, says policy is very restrictive and by a historically wide margin.”



Based on how equities are currently standing though, traders are either betting that the US economy will fare well in a deep recession, and/or businesses are prepared to weather the storm, Colas added.&nbsp;



Commercial banks are tightening their lending standards, making it more difficult for businesses and individuals to borrow money, according to an <a href="https://www.federalreserve.gov/data/sloos/sloos-202210.htm" target="_blank" rel="noreferrer noopener">October survey</a> from the Fed. Coupled with steep interest <a href="https://blockworks.co/news/cryptos-stocks-rally-on-fourth-straight-0-75-interest-rate-increase" target="_blank" rel="noreferrer noopener">rate hikes</a> from the central bank that show no sign of letting up, economists are calling for slower growth in the coming months.&nbsp;



The Richmond Fed’s <a href="https://www.richmondfed.org/research/regional_economy/surveys_of_business_conditions" target="_blank" rel="noreferrer noopener">regional surveys</a> of business activity, released Tuesday, showed manufacturing activity continued to slow in November. Meanwhile, the composite manufacturing index stayed negative, the data showed.&nbsp;



“The economy is clearly weakening here and inflation should continue to come down as wages and employment decline,” Moya said.



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Heightened Recession Fears Mean Uphill Battle for Equities, Crypto

Shalini Nagarajan

<div id="highlights-block_62a8825964885" class="highlights">
 <ul>
 <li>CEO Brian Armstrong warned a &#8220;crypto winter&#8221; could hurt the firm’s trading revenue</li>
 <li>The crypto exchange &#8220;grew too quickly&#8221; and &#8220;over-hired&#8221; since 2021, he said</li>
 </ul>
 
</div>



Coinbase will slash its workforce by 18% in anticipation of a recession, said CEO Brian Armstrong on Tuesday.



“Today I am making the difficult decision to reduce the size of our team by about 18%, to ensure we stay healthy during this economic downturn,” Armstrong wrote in a <a href="https://blog.coinbase.com/a-message-from-coinbase-ceo-and-cofounder-brian-armstrong-578d76eedb12" target="_blank" rel="noreferrer noopener">blog</a>. 



Armstrong warned changing economic conditions are signaling the onset of a recession, which could lead to another extended downturn — otherwise known across the industry as &#8220;crypto winter.&#8221; 



During the past crypto winters, Coinbase’s trading revenue suffered, he added. Armstrong also said the firm had “over-hired” since 2021 to leverage the opportunities available in the crypto market.



In a <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1679788/000167978822000077/coin-20220614.htm" target="_blank" rel="noreferrer noopener">regulatory filing</a>, Coinbase said 1,100 employees would be affected by the reduction plan. At the time of the announcement, its employee headcount last stood at over 4,900 on its website. The filing also shows the firm expects to incur between $40 million to $45 million in total restructuring expenses.



Indeed, trading volumes make up more than 90% of Coinbase&#8217;s overall revenue (based on 2020 disclosures). In this year&#8217;s <a href="https://s27.q4cdn.com/397450999/files/doc_financials/2022/q1/89c60d81-41a2-4a3c-86fb-b4067ab1016c.pdf" target="_blank" rel="noreferrer noopener">first quarter</a>, Coinbase trading volumes fell short of analyst estimates, dropping to $309 billion from $335 billion in the same period the year prior.



Revenue for the first quarter also came in lower than expected at $1.17 billion. Furthermore, the firm reported a net loss of $430 million, compared to a profit of $767 million the year before. This has weighed heavily on Coinbase&#8217;s share price. 



The company was valued at more than $86 billion when it went public in April last year. Coinbase stock has trended downward ever since — from its initial listing price of $382 to under $50 during pre-market trade on Tuesday, where it slipped more than 5%. Coinbase&#8217;s market value is now just over $11 billion.



&#8220;Even for the most contrarian of investors, it’s never nice to see this much blood on the streets,” Tim Frost, CEO of Yield App, told Blockworks.



“While plenty predicted the kind of levels that bitcoin is now facing, few anticipated the journey. Within one short month, we’ve seen the loss of one of the industry’s biggest projects [Terra], while some of the most established names are now beginning to waiver. It is certainly enough to put all but the most battle-hardened investors on high alert.”



The announcement comes less than two weeks after Coinbase said it would freeze hiring and <a href="https://cms.blockworks.co/coinbase-latest-crypto-firm-to-cut-costs-amid-market-downturn/" target="_blank" rel="noreferrer noopener">rescinded</a> a number of accepted job offers.



Other crypto companies have been slashing costs by reducing their workforce. <a href="https://cms.blockworks.co/crypto-com-cutting-5-of-workforce-amid-digital-asset-downturn/" target="_blank" rel="noreferrer noopener">Crypto.com</a>, Gemini, BitMEX, Buenbit, Bitso have all recently announced layoffs amid <a href="https://cms.blockworks.co/crypto-total-market-capitalization-under-1t-after-10-fall/" target="_blank" rel="noreferrer noopener">tumbling</a> cryptocurrency prices.


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