Industry Insights on Global Recession Impact for Blockchain, Cryptos
The question of what a global economic downturn would mean for blockchain and cryptocurrencies continues to slide around even as market predictors paint a gloomy outlook based on views from the financial sector where they see the coronavirus outbreak as turning a promising growth year into a deep dive.
Ahead of virtual meetings of the International Monetary Fund’s 189 member states next week, its Managing Director, Ms. Kristalina Georgieva, has hinted on Thursday that the world should expect “the worst economic fallout since the Great Depression”.
A similar view was echoed by billionaire investor, Ray Dalio, who runs the world’s largest hedge fund, Bridgewater Associates. He sees the coming economic downturn as resembling the effects of the Great Depression which lasted from 1929 to 1933 and “bigger than what happened in 2008”.
With predictions that some countries may end up experiencing financial crisis particularly as they don’t have the means to inject the necessary liquidity into their systems from their reserve, what a global recession could mean for digital assets is back at the fore.
“A recession will be the catalyst for the mass adoption of digital assets and decentralized finance (DeFi),” says Jason Wu, CEO of DeFiner.org, a peer-to-peer network for digital savings, loans, and payments, explaining how DeFi builds trust based on code and mathematics whereas the traditional financial system is based on human trust and company reputation. He adds:
“The 2008 financial crisis taught people that financial intermediaries are not always trustworthy. The current financial system is associated with high-costs and lacks transparency. Thus, a future financial crisis could also be a factor in proving the worth of DeFi. Bitcoin was born from the last financial crisis and DeFi will thrive in these economic conditions.”
He expects the cryptocurrencies market to face liquidity issues and a price drop like all other financial assets. Then it will suffer together with other industries including financial institutions that will go into default and bankruptcy for central banks to step in and print more money leading to inflation. A likely loss of faith in the existing financial system could lead many to DeFi as an alternative, Wu suggests.
Nick Cowan, CEO of the Gibraltar Stock Exchange Group, does not expect cryptocurrencies to suddenly become a fixture in the safe-haven category with gold, for example, in a post-pandemic market. “Rather, adoption levels will continue to increase, particularly as major financial institutions and fintech platforms continue to show interest in this asset class,” he said. “However, the idea that blockchain-powered finance is limited to cryptocurrencies is passé, and there’re other significant developments enabled by blockchain that will broaden global liquidity pools, specifically the proliferation of tokenized or digital securities.”
Wu supports this view saying that a global recession will be good for digital assets but its market will first be crushed at the beginning due to the liquidity crisis before prospering thus going through three phases: Liquidity, Suffering, and Thriving.
Another upside on what to expect from the global pandemic is “an even greater spotlight on digital assets, each from governments, central banks, traditional investors, and enterprises”, says Erick Pinos, Ontology Americas Ecosystem Lead.
“This is due to their ability to offer users increased trust, security, and access, while also providing an opportunity to avoid many of the risks associated with traditional markets and fiat currencies.”