Until recently, the cryptocurrency markets were believed to be largely disassociated from the traditional world of finance. Movements in the latter had little effect on the former. But when the stock market slumped a few weeks ago, bitcoin also dipped. It could have just been a coincidence. Or, as the lines separating Wall Street and Crypto Alley become increasingly blurred, it could have been evidence of a newfound interdependence. Cryptocurrency certainly isn’t immune from pronounced and protracted slumps, but the prospect of a “crypto recession” is a new one.
Transaction velocity is a metric that’s commonly used to measure the rate at which money changes hands – or changes wallets in the case of cryptocurrency. High velocity means a unit of money is being frequently re-used to purchase goods and services. When people are spending, it means they’re not worried about what tomorrow may bring and have no fear of recession. Cryptocurrency is more than just a form of digital cash, but transaction velocity can still be applied – and right now that velocity has slowed to a crawl.
As news.Bitcoin.com reported last week, on-chain transaction volume has fallen to less than half its December peak. This is believed to be a consequence of high fees making BTC too expensive to send, forcing bitcoiners to hoard the stuff rather than spend it. In addition to transaction volume being down, bitcoin velocity is at its lowest level since 2015, Coinmetrics reports. The concept of BTC as a store of value was pushed aggressively by bitcoin core supporters last year, and this is likely an attributing factor for reduced velocity. But what about other cryptos that haven’t been crippled by high fees?
Ethereum’s velocity (depicted in red) has plunged sharply since January, to the extent where it has now returned to a level it was at in early 2017. Back then, ETH was trading for $14. Ethereum hasn’t been shilled as a store of a value, and yet people currently seem more inclined to hold onto it than spend it, despite there being no shortage of ways to fritter away one’s ether. Coinmetrics has also produced a chart for zcash which shows the same pattern, and also litecoin to a lesser extent.
Coinmetrics concludes: “Assets in this sample are circulating more slowly than usual. (People are trading less, spending less, etc). When this happens in the USD, it’s usually a sign of a recession.” It’s hard to state with certainty that this is the case with crypto assets. All that can be asserted is that it’s a strong possibility. If cryptocurrencies had been rising rapidly, it would make more sense for them to be hoarded, but since mid-January, most assets have stagnated or slid. In fact, bitcoin is more stable than it’s been in months, and yet velocity has been reduced to a crawl. Either everyone’s saving in readiness for the next moon mission, or a crypto recession is brewing.