If you hold cryptocurrencies like XRP (XRP +0.89%) or Bitcoin, (BTC +0.53%) you're probably not sure how they'd hold up in the event of an economic recession. Whether it would make sense to buy more of either asset in such a scenario is an even bigger question, as a timely purchase during hard times might pay off significantly when conditions improve down the line.
Are either of these assets worth buying if the economy starts to recede? Or would it make more sense to dump both? Let's unpack this issue and make a game plan so that you'll be prepared if something happens in the coming years.
CRYPTO: XRP
Key Data Points
Here's how a tough economy could impact these coins
In the U.S., an economic recession is generally defined as a period of at least two consecutive quarters in which the gross domestic product (GDP) decreases rather than increases as normal. Usually recessions are accompanied by higher unemployment, reduced consumption of goods and services, reduced international trade volume, and falling asset prices, particularly in more liquid assets like stocks and cryptocurrencies, but often in harder assets like real estate as well.
It's unpleasant to think about but consider the mechanism for why asset prices decline when the economy is having trouble. People believe that they'll be better off having cash in hand than seeing their capital eroded as assets become harder to offload and priced lower than before. In many cases, people need to liquidate their investments to pay their bills, as their sources of income dry up while the economic tide withdraws.
In such a scenario, the easiest assets to liquidate are the most likely to get sold first. That means stocks and cryptocurrencies would be on the chopping block before safer and harder-to-transfer assets like real estate. And typically, it's the riskiest assets that start taking the deepest hits the soonest in a recession, as risky plays tend to assume that the economy will continue expanding, as it's an expansionary phase that supports the drive to explore new horizons of business and industry in the first place.
So what does that mean for holders of less-risky cryptocurrencies like Bitcoin and XRP?
While it depends on the length and depth of the recession, they're very likely to get hosed. Declines of 80% or more wouldn't be surprising during a longer recession. But for those who could retain some capital and load up on one of these two coins, there could be a big opportunity in store.
CRYPTO: BTC
Key Data Points
There's a correct choice here if you can make it when it counts
XRP is not the coin to buy if there's a recession. Here's why.
XRP gains value by capturing fees when the users of its network perform international money transfers. They do those transfers because the alternative approach is to use legacy technology that's far pricier and slower. Its investment thesis is that over the long term, more and more of those users, which are typically financial institutions like banks and currency exchange houses, will be drawn to its more efficient new technology, enabling it to draw larger and larger transfer volumes, and more fees as a result.
Recessions tend to cause volumes of international trade to decline, as buyers have less money. Sellers may struggle to sell their products at high price points if supply and demand become mismatched. Both of those factors reduce the volume of transactions for XRP and its fee revenue. There's also the possibility that investors will need to sell their XRP to pay for their expenses, driving the coin's price down further.
Therefore, economic recessions are a fierce threat to XRP's value across multiple vectors, at least in the short term. Note that if the coin's value falls during a recession as a result of these factors, it doesn't actually detract from its core investment thesis for it to accrue value over the long term, it just means investors would likely need to wait a lot longer before seeing the price of their coins appreciate in value. And if fundamental economic, financial, or trade relationships are permanently reordered as a result of the disruption, which is often the case, the coin might struggle to regain its prior heights.
On the other hand, Bitcoin only faces one major pressure during a recession: People selling their coins to pay for their spending needs.
Even during hard times, it'll still retain its capabilities as an effective hedge against inflation, and as a store of value. The mechanism by which it gains in value over time -- its scarcity due to regular halvings of its mining reward -- will continue to grind forward regardless of whatever economic phenomena are happening. Similarly, a deep recession could make a company like Ripple, the issuer of XRP, become insolvent, and the chain could therefore collapse.
But Bitcoin isn't run by a company, it's an independent blockchain that exists as a network of many different actors working in their self-interest. That makes it more durable in the face of deeper shocks to the global economy. And that's why, assuming you can keep some capital on hand for when the economy is struggling, it makes more sense to buy Bitcoin than XRP, provided that you're willing to hold it for at least a few years or longer.
