The crypto pendulum swings back to ‘real economic value’: can Bitcoin price survive a recession?

(Kitco News) After briefly touching $17,000 over the weekend, Bitcoin it is back above $20,000. But can the price outlook recover as recession warnings mount and inflation continues to dominate market headlines? Stablecorp CEO Alex McDougall weighs in.

When looking at price forecasts for the rest of 2022, investors need to separate the technology angle of crypto from the price angle, McDougall told Kitco News.

“The technological aspect of cryptocurrencies will work extremely well in a recession environment. And especially if the recession is bad and causes confidence to fluctuate. Don’t forget that cryptocurrencies were born out of the 2008 crash,” he said.

On the other hand, McDougall doesn’t see Bitcoin’s price doing as well in a downturn. Here’s why: “I don’t think there’s going to be a big retail push or a flight to Bitcoin in a recession. But at the same time, the institutions that have finally jumped on board are not selling,” he said. “But if there’s a risk-type event where this version of finance doesn’t work anymore, that’s where you’ll start to see real turnover.”

During stagflation, a period described by slowing growth and high inflation, Bitcoin is likely to fluctuate within a price band. “I don’t think it will completely collapse in a recession. Instead, it will consolidate for the next round up,” McDougall said.

However, if the US economy enters a period of stagflation accompanied by continued rotation of risky assets, there could be further pain for the crypto space, including Bitcoin, the CEO of Stablecorp noted.

“Everyone was running around like chickens with their heads cut off for the last year, chasing gold coins falling from the sky,” McDougall described. “The pendulum swung back to where the real fundamental economic value is, and instead of building a quantum leap into the future, we’re seeing a lot of projects and companies refocus.”

Despite the drop, there is still enough capital in the space to move these real-value crypto projects forward, he added.

“There are billions of dollars going into venture funds, but a ton has gone back to ‘let’s take a deep breath, what is the core, what are you doing in the real world, how is blockchain really helping? What is the fundamental value of what you are building?

On the tech side, McDougall is a long-term bull as he sees him outperforming the future of finance at some point. “Technology has been generally accepted by the world at large as that’s where the future is going to go at some point, whether it’s now, five years from now, 10 years from now, 15 years from now. And whether it’s government-driven or the sector, there will be blockchain in the future,” he said.

Going forward, the dueling narratives of cryptocurrencies will continue to push prices in different directions.

“Cryptocurrencies are a completely different fundamental value proposition than stocks. Everyone understands how we value stocks. We could argue about whether it’s this discount rate or this bear market forecast. In crypto, we don’t have a fundamental value thesis that is lined up,” explained McDougall. “We’ve tried a bunch on: digital gold, it’s money, PQ = MV.”

These narratives often drive prices, and the latest market move has been this dual narrative that cryptocurrencies are seen as a technology stock, but also as a risk asset and a hedge against inflation.

“So you end up with this crazy volatility based on which buyers are driving the narrative,” McDougall said. “In an industry as novel and narrative-driven as digital assets, there is always room for more short-term pain.”

Additional price volatility will be hard for the crypto industry to digest because it would likely reveal more signs of spillover effects following the collapse of the TerraUSD stablecoin in early May. Additionally, I would highlight the challenges with Ethereum’s centralized lending platforms and staking liquidity services, McDougall noted.

“[But] Whenever digital assets move, they usually move significantly in both directions. When there are specific, targeted events like this, it doesn’t change our macro vision of a future with adoption growing exponentially larger than it is today and forming a significant part of a more efficient, transparent and open world,” he said.

For Bitcoin specifically, McDougall noted that his payment currency narrative is finished. But the store of value thesis of him and Bitcoin as an anchor for the entire industry is just beginning. “You need to have a piece of that in your portfolio,” he added.

McDougall spoke to Kitco News on the sidelines of the Consensus 2022 conference held in Austin, Texas from June 9-12. He also contributed additional comments following a crash in the crypto space after the conference.

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