The Crypto-Economy Is in a Recession
A recession is defined by Investopedia as “a significant decline in economic activity that goes on for more than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade.” By such a definition the cryptocurrency economy is in a full recessionary period. Let’s take a look at what metrics one might use to make such a determination.
The Dominance of Bitcoin
As a result of the fact that Bitcoin is a base trading pair for nearly 100% of tokens in existence, Bitcoin price volatility impacts other token prices. We can then say that when Bitcoin sneezes, the rest of the market catches cold. As a result of this economic dominance, and that the price of Bitcoin is inseparable from the operation of the network, the first set of metrics one must incorporate are those surrounding the operation of the Bitcoin network.
The Hash Rate
The Bitcoin hash rate is a means by which to measure the amount of investment in physical equipment, rent, employment, and electricity consumption of the mining sector. We can see in the chart below that the Bitcoin hash rate leveled off in September and began a full decline in November. According to industry publication CoinDesk, miners employ the greatest percentage of employees in the industry and less miners in operation means less employees required to maintain them.
The USD Price
We can see that the Bitcoin price decline matched the decline in hash rate almost exactly at the same time the hash rate dropped off. The loss in the ability for miners to profit forces them to turn off equipment and dump stores, which drives down the price until equilibrium is reached.
Volume
One of the most important facets of measuring a recession is wholesale/retail trade, as this represents new value entering the economic sector as a result of the sales of goods and services. While these numbers are not directly translatable to cryptocurrency, the amount of trading volume over time does serve as a worthy substitute. Prior to 2017, Bitcoin market volume was heavy manipulated by Chinese exchanges. Since the PBOC forced Bitcoin exchanges to shutter their doors, volume has never recovered (proving PBOC suspicions as correct). While November 2018 did see an increase in overall trading volume, the YTD trend is still very much in decline, with daily trading volume in October reaching lows of $2.5 billion.
Venture Capital Investment
While it was widely reported that cryptocurrency venture investments were up nearly 300% in 2018, one must then counter that against the recent reports of layoffs and the folding of underfunded startups. One may begin to assume that funding may very well have been provided in cryptocurrency early in 2018 and measured in the USD value at the time. The announced 13% layoffs at the largest Ethereum-based corporation ConsenSys do not seem to support the narrative of a $3.8 billion-dollar cash infusion in venture investment and yet may support that funding was provided in cryptocurrency.
Known Unknowns
We can begin to see that one of the most important metrics for gauging a truly healthy economy isn’t tracked: the number of new businesses startups in the fiscal year. This number would then correlate directly with the amount of venture investment, revealing if those funds are being invested into new technologies or supporting existing platforms.
Some visibility is provided into this area via the ICO sector. According to ICO launch tracking website CoinSchedule, new token starts have been in sharp decline since October 2018, and are currently at their lowest levels in 18 months.
The Big Picture
As Bitcoin has begun a full retraction spanning the entire fourth quarter of 2018, price correlation of other cryptocurrency assets and businesses has suffered accordingly. Given the overall lack of confidence in the technology, and the looming specter of Department of Justice enforcement efforts across the space, there isn’t much respite on the visible horizon. Current perceptions of the industry may have more sophisticated investors waiting to pick up bargains after the smoke clears in the wake of enforcement efforts. It’s quite possible the industry may not recover until well into 3Q2019.
