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

Kitco News

(Kitco News) After briefly touching $17,000 over the weekend, Bitcoin is back above $20,000. But can the price outlook recover as recession calls grow 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 crypto's technology angle from the price angle, McDougall told Kitco News.

"Crypto's technology aspect will do extremely well in a recessionary environment. And especially if the recession is a bad one that causes confidence to fluctuate. Don't forget, crypto was born out of the 2008 meltdown," he said.

On the other hand, McDougall doesn't see Bitcoin price doing all that well in a recession. Here's why: "I don't think there's gonna be a huge retail push or flight into Bitcoin in a recession. But at the same time, institutions who have finally gotten on board aren't selling," he said. "But if there is a risk-type event where this version of finance is not working anymore, that's where you'll start to see some real rotation."

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 crash in a recession. Instead, it will consolidate for the next round of upside," McDougall noted.

However, if the U.S. economy enters a period of stagflation accompanied by a continuous rotation out of risk assets, there could be more pain for the crypto space, including Bitcoin, Stablecorp CEO noted.

"Everybody was running around like chickens with their heads cut off during the last year, chasing gold coins falling out of the sky," McDougall described. "The pendulum swung back to where the real fundamental economic value is, and instead of building a quantum leap out in the future, you're seeing many projects and companies refocus."

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

"There are billions of dollars that are dedicated to venture funds, but a ton of it has swung back to 'let's take a deep breath, what is the core, the real-world thing that you're doing, how is blockchain actually helping it, what is the fundamental value of what you are building'?"

On the technology side, McDougall is a long-term bull as he sees it overtaking the future of finance at some point. "The tech has been generally accepted by the broader world as this is where the future will go at some stage, whether it's now, five years from now, ten years, or 15 years. And whether it's government-driven or sector-driven, there will be blockchain in the future," he said.

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

"Crypto is an entirely different fundamental value proposition than stocks. Everybody understands how we value stocks. We might argue over whether it's this discount rate or this bear market forecast. In crypto, we don't have a fundamental value thesis that's aligned on," McDougall explained. "We've tried a bunch on — digital gold, it's money, PQ=MV."

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These narratives often do drive prices, and the latest market mover has been this dual narrative of crypto being viewed as a tech stock but also as a risk-off asset and an inflation hedge.

"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 pain in the short term."

Additional price volatility will be hard to swallow for the crypto industry because it would likely reveal further signs of contagion effects following the TerraUSD stablecoin collapse earlier in May. Also, it would highlight challenges with centralized lending platforms and Ethereum staking liquidity services, McDougall pointed out.

"[But] whenever digital assets move, they generally move significantly in both directions. When there are specific and targeted events like this, it doesn't change our macro view of a future with adoption growing exponentially higher than it is today and forming a significant portion of a more efficient, transparent, and open world," he said.

For Bitcoin, specifically, McDougall pointed out that its payment currency narrative is done. But its store of value thesis and Bitcoin being the anchor for the entire industry is just getting started. "You need to have a part of it in your portfolio," he added.

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

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