In a detailed analysis, Will Clemente, on-chain analyst and co-founder of Reflexivity Research, presented a thought-provoking perspective on bitcoin‘s potential price performance in a recessionary environment. His views challenge the widely held belief that btc, as a “risk” asset, would suffer in economic downturns, offering a nuanced understanding of its relationship to market liquidity and economic cycles.
Why bitcoin May Rise During a Prolonged Recession
Gracious argument It depends on understanding btc as a hedge against monetary debasement rather than a conventional asset linked to economic performance. He explained: “bitcoin is a hedge against monetary debasement. It falls when liquidity decreases and increases when liquidity increases.”
This perspective is crucial to understanding bitcoin‘s behavior after December 2021, when it experienced a crash. According to Clemente, this was a direct result of reduced liquidity in the market, a scenario consistent with the nature of btc as a monetary debasement hedge.
With current economic indicators pointing towards a reduction in inflation, Clemente suggests that the era of strict monetary tightening could be coming to an end, setting the stage for greater liquidity. Interestingly, he argues that a recession could actually be a catalyst for this increase in liquidity, thus creating a bullish environment for the btc price.
“bitcoin has no cash flows and is therefore not necessarily tied to the economy, as it is historically tied to liquidity,” he added, emphasizing the unique position of cryptocurrencies in the financial ecosystem.
Addressing possible scenarios of strong credit crises like the one in March 2020, Clemente acknowledged that initial reactions could favor traditional safe havens like the USD or Treasury bonds instead of bitcoin. However, he predicted that any such event would likely be followed by significant liquidity injections, leading to a rapid recovery of bitcoin, resembling a V-shaped curve.
Liquidity is more important than the CPI
Reflecting on past misconceptions within the community, Clemente admitted that many, including himself, previously misunderstood btc‘s role as a hedge. “The biggest thing most Bitcoiners (including me) got wrong in 2021 was the idea that btc was a hedge against the CPI and not against liquidity. The CPI is lagging behind liquidity,” he stated.
With the current drop in inflation, he expects a shift towards greater liquidity, which he believes should positively influence the value of bitcoin as a hedge against monetary debasement.
Clemente’s analysis also addressed the broader perception of the market. In response to a critic’s claim that the market treats btc as a high-beta risk asset, he emphasized the importance of examining the correlation between bitcoin and liquidity trends.
He challenged skeptics to consider whether liquidity is poised to increase or decrease in the coming months, stating that market behavior aligns with his analysis. “Overlay bitcoin with liquidity and then answer the question of whether liquidity is set to increase or decrease over the next 12 months from here. The market couldn’t agree with me more. All facts, no feelings. Study,” she said.
In conclusion, Clemente’s comprehensive analysis provides a new lens through which to view btc‘s potential trajectory in a downturn. By linking price to liquidity trends rather than direct economic performance, he offers a compelling argument for why a recession could, counterintuitively, be beneficial for bitcoin.
At the time of publication, btc was trading at $37,201.
Featured image from iStock, chart from TradingView.com
