What does the next financial crisis mean for Bitcoin?

What does the financial crisis mean for Bitcoin? Bitcoin supporters tend to think that such a thing is a devastating blow to society, but it may also be an opportunity for Bitcoin to prove itself. When the old legal currency collapses, people will flock to Bitcoin as a new asset safe haven - the 21st century version of gold. Overstock's boss even prepared three months of food rations and $10 million in gold for employees to meet the next wave of financial crisis...

Many Bitcoin fans are not optimistic about the health of the global economy. Their distrust — even pessimism — is fueled by a controversial business cycle theory popular in Bitcoin forums. The theory holds that loose monetary policy by central banks and fractional reserve banks encourages entrepreneurs to pursue projects that do not actually pay off, setting off a chain of events that allows the economy to boom, peak, and then crash.

Although this theory is highly controversial in the academic economics community, a considerable number of people in the Bitcoin community support this theory, and I happen to agree with this theory. Therefore, these Bitcoin followers believe that this theory contains valuable information about the real world market, and often think about what will happen to our beloved digital currency, Bitcoin, if a recession occurs and the situation is so bad that the traditional financial system is offline and unable to cope.

Bitcoin supporters tend to think that such an event is a devastating blow to society, but it may also be an opportunity for Bitcoin to prove itself. When the old fiat currency collapses, people will flock to Bitcoin as a new asset safe haven - the 21st century version of gold. Therefore, Bitcoin's purchasing power and global acceptance will rise rapidly, quickly becoming the world's first choice of currency after the collapse of the old monetary system.

There have been some small-scale examples of this happening. In 2013, the Cypriot government announced a radical move: it would use citizens’ personal bank deposits to help fund its bailout. Cypriot residents, fleeing government extortion, flocked to Bitcoin. Bitcoin prices and trading volumes soared. Two years later, in the summer of 2015, Bitcoin became popular again when the global economy was facing its worst possible scenario. Greece was facing a debt crisis and a possible exit from the European Union, and China’s economy was stumbling. Bitcoin prices soared again when many Chinese citizens—and many who speculated on Greece’s exit from the European Union—poured into the Bitcoin market to consolidate their wealth.

Therefore, Bitcoin followers are waiting for the opportunity. They firmly believe that the next global economic recession will be an important historical turning point for Bitcoin. For example, this article "From Cyprus to the Greek Crisis - Rethinking the Safe-haven Hedging Function of Bitcoin" is a typical point of view.

However, these people may get a disappointing result, because the recession of traditional finance may taper off slowly, without a real climax, and then the rise of Bitcoin will be shattered overnight. Although many people also believe that the recession will get worse and worse until the economy collapses, economic theory shows that recessions can have different lengths and intensities. The next recession may be very severe or relatively mild - past recessions do not determine the severity of the next recession. Therefore, Bitcoin's adoption rate will not necessarily change linearly with the recession. If the recession is particularly bad, Bitcoin may be widely sought after. However, if the recession is mild, people may not be worried enough to consider using a different currency.

So does this mean that widespread adoption of Bitcoin is wishful thinking on the part of Bitcoin enthusiasts? Not exactly. There is no doubt that the state of traditional finance is not very good at the moment. It took the US six years to get its unemployment rate to the Federal Reserve’s target of 5.5%, and much of the decline in the rate is due to people dropping out of the labor force and not looking for work. Moreover, job reports have been mixed; some months have seen growth above expectations, while others have been subpar. And the economies outside the US are not stable. China’s economy is in a sharp decline, with its People’s Bank of China even initiating emergency controls. Greece and Puerto Rico are also facing potential debt crises that would threaten global markets. Meanwhile, central bank policy seems to be losing its effect; the Federal Reserve has kept interest rates at almost 0% for almost a decade, and the US economy has not shown any clear signs of improvement since the 2008 financial crisis. Traditional fiat currencies are likely to fall at some point, but this may also be a slow process. Therefore, Bitcoin has a lot of room to grow in order to replace fiat currencies, and that moment may not come as soon as some people think.

Of course, we may still face a recession. We may experience a severe economic depression, and people will flock to a new monetary system - Bitcoin will be a good choice. But we must also understand that the end of the world may not come, and Bitcoin followers may have to endure a long and bumpy road. If Bitcoin becomes a valuable option, the world may also slowly abandon traditional fiat currencies.