Fears about a potential recession are bubbling up once again following a weak jobs report, triggering many experts to argue that the Federal Reserve has waited too long to cut interest rates. Against that backdrop, is bitcoin — an asset which has long been touted as an “inflation hedge” — still a good investment in the current economic landscape?
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While bitcoin and the crypto ecosystem as a whole have bounced back in 2024 from very turbulent times, some experts argue that the asset won’t provide sufficient protection in a recession. For instance, Grayscale head of research Zach Pandl noted that were the U.S. to experience a recession, bitcoin could take a hit, albeit a lesser one than in the past.
“Bitcoin is a risky asset with a positive correlation to stocks, and its price could be expected to fall in a recession — as it did in early 2020 with the onset of the COVID-19 pandemic,” Pandl said.
He added that the best advice for most investors is to buy and hold a diversified portfolio of assets, and to avoid market timing.
As Morning Brew reported, bitcoin dropped 20% earlier this month to below $50,000 by Aug. 5, “its lowest price since February of this year. … The drop coincided with a widespread market meltdown, largely due to fear of a U.S. recession, Japan’s index plunging, and geopolitical instability in the Middle East.”
As of Aug. 19, bitcoin was hovering around $59,000, up 100% in the past year, and down 11% in the past two weeks, per CoinGecko.
Here are three reasons bitcoin could be a bad investment if a recession were to materialize, according to experts.
Its High Volatility and High Correlation to Tech Stocks
Bitcoin’s high volatility makes it prone to significant price swings, which can lead to substantial losses during economic uncertainty such as a recession, some experts argued.
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Unlike traditional assets, bitcoin lacks intrinsic value and does not generate income, making it a speculative investment, said Robert Hodgins, founder of Sand Hill Road Technologies Fund.
In addition, Hodgins noted that bitcoin’s price often correlates with high-risk assets such as tech stocks, which tend to decline in a recession.
The sentiment was echoed by Robert R. Johnson, Ph.D., CFA and professor of finance at Heider College of Business, Creighton University, who also argued that it trades like a risk asset and not like a currency. As such, he said it isn’t a good investment, recession or not.
“People who are speculating in bitcoin are buying into an oft-repeated but unproven narrative that somehow bitcoin is the currency of the future,” he said. “You can’t invest in bitcoin because there is no way to fundamentally determine the intrinsic value of bitcoin.”
Bitcoin is a ‘Proxy for Big Tech’
Other experts argue that bitcoin is nearly a “proxy for Big Tech” and the most recent market drop has only been the latest example of it.
“We are long past the days when bitcoin could be claimed as a hedge for market volatility, inflation or economic stagnation,” said Stephen Kates, CFP, principal financial analyst for RetireGuide.com.
According to Kates, bitcoin is a risk-on asset and, when the market “rips on bullish sentiment,” bitcoin goes with it. Meanwhile, he added that the opposite is also true.
“In the case of a real recession where credit is tight, job losses are above average and money is tight, bitcoin will not shine,” he said.
He also noted that bitcoin depends on new money coming in to grow- it has no company fundamentals, earnings or innovation to buoy the price in the event of a crisis or crash so it behaves like a risky growth stock that is held by a small group of large investors who control the supply.
“Invest accordingly,” added Kates.
It’s a Speculative Asset
Jason Sorens, senior research fellow at the American Institute for Economic Research, noted that one reason bitcoin is not a good investment if a recession materializes is that some people buy it as a speculative asset.
“But people usually buy speculative assets when their budgets are flush,” Sorens said. “If they need quick cash to make rent, people are more likely to sell bitcoin than buy it, driving down its value.”
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This article originally appeared on GOBankingRates.com: 3 Reasons Bitcoin Could Be a Risky Investment If Recession Is Predicted
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
