In a wide-ranging report leading cryptocurrency market data and index provider CryptoCompare has suggested that in the short to medium term it sees a recession in global financial markets, although geopolitical tailwinds have “strengthened the long-term value proposition” of crypto.
In its Outlook 2022 report, CryptoCompare details that in financial history there have been instances in which a crisis caused all markets to “turn macro,” meaning in the short-term fundamental characteristics of assets “are no longer relevant, regardless of their relationship with the causation of the crisis.”
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Suggesting the incoming crisis may see markets “turn macro,” CryptoCompare noted that the global economy and financial markets “are still recovering from the aftermath of the COVID-19 pandemic” which created “rampant supply chain issues” and led to “severe monetary and fiscal stimulus.”
These stimuli “left us in a dangerous inflationary environment” that is now being influenced by a refugee crisis “that may disrupt the European economy” along with a “worsening commodity crisis that impacts both demand and supply.”
The report details that March 2022 marked the 13th consecutive month where inflation in the United States was above the Federal Reserve’s 2% inflation target, with an official 8.5% figure being released on April 12. The inflation rate may be higher, the report adds, due to constant changes in the methodology used to measure the Consumer Price Index (CPI).
While the Federal Reserve and Bank of England have raised interest rates by 0.25% last month, CryptoCompare notes curbing inflation is now “extremely difficult” because of the after-effects of the war. Accelerating interest rate rises, the firm noted, would “devalue debt and may cause a cascade of outflows in fixed income markets,” threatening the stability of the financial system.
Taking all of this into account, CryptoCompare noted that “in the short to medium term, we see no other outcome but an impending recession.” The firm pointed to a recent inversion of the Treasury yield curve, where 2-year treasury bonds are yielding more than 10-year bonds. Per the firm, this has “historically been the clearest leading indicator of a recession.”
CryptoCompare added that if a “recession does indeed come to fruition” it expects crypto markets to “behave the same way they did following the COVID-19 pandemic,” meaning they would endure a sharp correction.
Crypto markets’ long-term outlook
Nevertheless, CryptoCompare’s report details the firm believes “the long-term value proposition of cryptocurrencies has been strengthened by the geopolitical crisis,” and as such a potential correction “may be used as a buying opportunity by long-term holders.”
A decentralized monetary system, the report adds, would have been “invaluable to those who have suffered the most from the crisis,” including Ukrainians who have been unable to transfer wealth and Russians who have been shunned away from global markets because of sanctions.
The report further details that the role of crypto in high-inflationary environments has been positive over time, with Venezuela, Argentina, and Nigeria – three countries with the highest inflation rates – being represented in the top 10 of Chainalysis’ Global Crypto Adoption Index.
The firm added that looking forward “there are various macroeconomic events that could further influence crypto markets,” including a potential invasion of Taiwan by China. Sanctions on China would, however, have “consequences for inflation, supply chains, and the world economy as a whole.”
Although digital assets are still subject to important disadvantages and headwinds, crypto does appear to be a viable hedge against traditional systems, both financial and political, and a way to vote for a competing decentralized, and non-political monetary system.
The firm concluded that this “value proposition will likely grow in force as geopolitical and economic challenges continue to plague the world stage.”
The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.
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