The U.S. stock market is hovering around an all-time and the S&P 500 is up around 19% so far this year. The March 2020 sell-off gave us a glimpse at how swiftly panic and fear can plunge stock prices -- but while the effects of the COVID-19 pandemic continue to ravage our daily lives, small businesses, and many sectors of the economy, the worst seems to be over for the broader market.
We don't know when or in what form the next recession will come. But we do know there are different ways to prepare for it today than there used to be. The old tried and true method for weathering a recession is through cash and high-quality dividend stocks with strong balance sheets. This method remains a great option -- but so does investing in bitcoin (BTC 0.61%). Here's why bitcoin, the world's best asset over the last decade, is also one of the best ways to combat a recession.
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1. It was built for it
Bitcoin was formed in the crucible of the U.S. Great Recession. In response to the widespread failure of the traditional financial system, bitcoin's anonymous founder(s) aimed to create a currency that people could trust and would function without third-party intervention. They succeeded in creating a non-fungible store of value independent of any sovereign nation.
2. It is inherently diversified
A U.S. dollar in China is the same as a U.S. dollar in France. But it's still the official currency of the U.S., meaning it comes with all the pros and cons of the U.S. economy. What's more, it can be hard to obtain, store, and use in a capacity other than cash in many countries.
Bitcoin is inherently diversified because it isn't subject to one economy's gain or loss. Rather, it represents wealth without borders.
As we saw in 2008, recessions can ripple through countries with shared economic interests. Although the U.S., E.U, Japan, and many other developed countries faced economic downturns in 2008, many of the world's developing countries actually expanded from 2007 to 2009.
Outside of macro trends, Bitcoin's price can move based on regulation, environmental concerns, government crackdowns on mining, changes in institutional adoption, or any slew of factors. But again, these factors occur on a case-by-case basis, ensuring that bitcoin's value isn't vulnerable to a singular event.
For example, the U.S. Security and Exchange Commission is cracking down on cryptocurrency exchanges such as Coinbase (COIN 4.13%) as it attempts to regulate crypto-related financial products. This news has a direct effect on the price of Coinbase stock. News like this can move the price of bitcoin as well, but to a lesser degree, because bitcoin's future doesn't depend on the regulatory policy of any one nation -- even the U.S.
3. It is a secure and globally transferable store of wealth
Bitcoin's value is derived from its scarcity, security, and transferability. Like gold, bitcoin has characteristics typical of a commodity in the sense that it has value no matter how an economy is performing. Unlike a stock, its upside is not directly the result of strong sector tailwinds, technological advantages, innovation, financial discipline, or a great management team. Rather, it has value in both economic expansions and contractions.
While it's true that Ethereum (ETH 1.56%) has more practical applications than bitcoin, and potentially more upside, bitcoin is better positioned to perform during a recession. Its purpose isn't centered around the growth of smart contracts, non-fungible tokens, or other practical use cases of blockchain technology. Rather, bitcoin's purpose is as a store of value.
4. Total supply is capped, and added supply is decreasing
Bitcoin garners a lot of credibility from the fact that its algorithm has stood the test of time. Since its inception in 2008, the bitcoin protocol has consistently regulated supply by ensuring the pace of bitcoin mining remains constant, and the added supply per block mined decreases over time.
Computing power represents how much demand there is for bitcoin. Naturally, it has increased. But unlike the effects of more sawmills on the lumber market or drilling activity on oil and gas supply, the amount of computing power involved is irrelevant, and doesn't affect supply in any way.
Built to last
If we compare bitcoin's attributes to those of other fiat currencies and cryptocurrencies, it's clear to see that bitcoin is tailor-made to be an asset worth owning during a recession. However, there's a good chance bitcoin could underperform Ethereum in the long run, as well as several alternative tokens with more upside.
For folks just getting started in the crypto space, however, bitcoin remains a good entry-level option to get skin in the game with less risk.
