Satoshi Nakamoto was hyper-conscious of the fallout from a US banking collapse.

Text included in his/her/their Bitcoin genesis block made specific reference to this January 3 2009 article in British newspaper The Times. It warned that UK chancellor Alastair Darling was again planning to bail out banks crushed by the credit crisis and a lack of capital in reserve.

How did it all fall apart? Well, when America sneezes, the rest of the world catches a cold, and the 2008 financial crisis was no different.

A collapse in subprime mortgage lending triggered a contraction in bank credit and the US economy entered the longest recession since 1927.

Global trading partners suffered years of economic repercussion. While the UK entered a period of relative growth in early 2010 after six consecutive negative quarters, more fragile Eurozone economies have struggled to shake off the spectre of debt ever since.

Greece set new and unwanted records with 63 consecutive months of negative GDP trajectory. Italy is still amid a banking crisis with government debt a bloated €2.3trn, 131.8 percent of GDP.

More robust countries like Germany and Japan have since returned to consistent growth and the US in particular has seen bountiful stock markets rise over the last half decade.

All the while, cryptocurrencies and their blockchain tech stack have been innovating in the background.

There is little solid economic data to compare, given how relatively new are the institutional and regulatory interests in Bitcoin and cryptocurrencies. But there are certain conclusions we can draw by looking at how cryptocurrencies are most often used by investors, sector-specific trends, and what tends to happen to securities and commodities in the face of a global economic downturn.

When is recession coming?

Signals from central banks and macroeconomic super-cycles alike mark late 2019 to early 2020 as the most likely start of consecutive quarters of negative growth.

The International Monetary Fund slashed global growth forecasts in remarks at the World Economic Forum in Davos. Mark Carney, who serves as both the head of the Bank of England and the chair of the G20’s Financial Stability Board, told reporters this month that the spectre of a no-deal Brexit in March 2019 could plunge the UK into recession.

Other self-inflicted wounds include a global over-reliance on Chinese growth which is now stalling. The rising cost of raw materials in steel and aluminium, driven by the Trump administration’s insistence on giving the Chinese a bloody nose on trade, is hampering growth in manufacturing, slowing output and cutting productivity.

Apple, for example, posted a staggering 27% drop in revenue from China quarter-on-quarter and President Xi Jinping has little room to manoeuvre.

What can we expect?

1) Crypto SaaS to grow

While the cypherpunk manifesto sought for Bitcoin to bypass legacy institutions and trade entirely peer-to-peer, cryptocurrency has found more customers as it has sought and accepted official regulatory status.

The industry that has sprung up to deal with this integration is undergoing massive growth: this is crypto SaaS, or Software-as-a-Service.

Mainstream capital expenditure now does not require investing large amounts in hardware, or hiring thousands of workers to support growth targets. SaaS instead allows for smaller ongoing investment, for example in monthly software subscriptions, lowering capital outlay and protecting the company balance sheet.

For the financial services industry, crypto SaaS means taking over all the day-to-day management of investing one would expect from a traditional brokerage: institutional custody, tax advisory services, or indexing tools like ETFs.

The first US Bitcoin ETF will be a breakout product, of that there’s no doubt. When investors don’t need to hold the underlying assets in a collection, there is lower risk from that exposure.

Morgan Stanley’s newer swap trading products, designed to give traders “synthetic exposure” to cryptocurrency, will become more like the norm.

While there has been a heavy focus on the inability of the Van Eck/SolidX Bitcoin ETF to gain regulatory status with the SEC, there are already exchange-traded products available elsewhere.

Switzerland became the first country to make this move in November 2018 with the Six exchange’s Amun Crypto Basket ETP, a product which tracks five leading cryptocurrencies, half weighted towards Bitcoin, with the rest split between XRP (25.4%), Ethereum (16.7%), Bitcoin Cash (5.2%) and Litecoin (3%).

2) Institutional investors seek safe havens

If global growth continues to fall, it is more likely than not that a growing number of pensions funds and investment banks will want some exposure to cryptocurrency, as they would with an kind of emerging asset class.

Retail investors tend to treat cryptocurrencies like commodities: as a kind of digital gold, a low-correlation hedge against volatility elsewhere in the wider stock market.

Bitcoin in particular is employed as a hedge against weakness in long-term government bonds, or in commodity prices like oil and natural gas.

[Editor’s Note: This is not investment advice. Cryptocurrencies come with high levels of risk and you should be prepared to lose any and all principal you invest].

Without solid 5% returns to rely on, pension funds will diversify away from previously high-growth FAANG tech stocks and towards those sectors considered safe havens.

We use ‘safe haven’ in its idiomatic sense here: commodities considered able to weather a potential economic crash. Common examples include silver and gold, real estate, art, wine or agricultural farmland.

The academic literature on this is mixed. A joint Norweigan-French research team looking at data from 2011 to 2015 found Bitcoin to be a poor hedge, but suitable for portfolio diversification and as a safe haven against extreme downward movement in Asian stocks.

Chinese researchers more recently - as published in the 2018 Journal of Applied Economics - conducted tail risk analysis, a study of both positive and negative correlation, and found cryptocurrencies to be independent of four major stock indices “which implies part of the safe-haven function [of cryptocurrencies], indicating their ability to be as great a diversifier for the stock market as gold.”

3) Sentiment becomes even more important

Sentiment plays a key role in cryptocurrency prices, because markets are open 24/7 and so much trading is enacted by algorithms and bots.

Python-based tools for sentiment analysis, like this one, scrape social media forums for positive comments as part of their prediction models.

Curious users of Reddit, the social media home of grassroots crypto discussion, put this to the test recently, flooding forums with positive language like the meme favourites “moon” and “lambo” and cutting back on bearish slang words like “hodl” and rekt”.

Internal sentiment is important, then. The external perception of the cryptocurrency market as a whole - in the face of a global contraction - is equally significant.

Are there rising numbers of cryptocurrency investors? Probably.

Despite a bearish market, there are bullish signals on the number of investors, taking into account the rising number of accounts created at cryptocurrency exchanges over the last 12 months.

Stronger, clearer and more prevalent regulation by governments and central banks worldwide, along with ETFs, index funds and easier entry points for retail and institutional investors, give market-watchers reasons to be optimistic.

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