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It’s now more than eleven years since the last global recession gripped national economies, causing years of austerity measures across many nations. It resulted in the near-total financial collapse of countries such as Greece and Cyprus. In the case of the 2008 crisis, the causes are well-documented. But it isn’t always so clear-cut, partly because cyclical movements are an inevitability in economics.
Which is why experts in finance and economics believe that we’re on the precipice of another global recession. All the indicators are there. Growth in the US economy is slowing, and a long-awaited first-stage trade deal with China is more limited in scope than many had hoped.
The outcome of the UK general election means that the country will suffer the inevitable economic instability as a result of leaving the European Union. Bond yields have gone down this year, while the price of gold has risen. Berkshire Hathaway has been stockpiling cash, indicating that Warren Buffett is waiting for markets to nosedive so he can scoop up an acquisition or two at a knockdown price.
A New Asset Class for the Next Recession?
It was at the peak of the last financial crisis that a pseudonymous cryptographer named Satoshi Nakamoto mined the very first Bitcoins. In the genesis block of the Bitcoin blockchain, Nakamoto nodded to the state of the economy by including a reference to the day’s headline in the UK Times newspaper – “Chancellor on brink of second bailout for banks.”
It seems almost poetic, then, that cryptocurrencies could end up being one of the investment tools of choice during the next economic downturn. Although Bitcoin is notorious for its volatility, it has become a safe haven for citizens in countries like Venezuela and Zimbabwe, where their national currency is depreciating.
However, Bitcoin itself isn’t likely to become the investment vehicle of choice for investors in the developed world, should a recession hit. Even in the worst-case scenario, currencies like the US dollar are unlikely to outpace Bitcoin’s volatility. But these days, there’s so much institutional cash tied up in Bitcoin and crypto-derivatives, that the cryptocurrency markets are likely to mirror the traditional markets in a downturn. And where Bitcoin goes, other cryptocurrencies tend to follow.
However, there could be a ray of hope for a crypto-based safe haven. Recently, a new cryptocurrency called Saga launched its token. While token launches aren’t anything unusual in the blockchain space, Saga stands out for a few reasons. It’s introducing an entirely new monetary model based on the IMF Special Drawing Right (SDR,) and the project boasts a stellar advisory team of economic and financial experts.
How Saga Works
Saga is essentially a blockchain-based smart contract that serves as a liquidity provider designed to dampen volatility. The smart contract will issue or burn tokens, called SGA, depending on supply and demand.
Whereas other stablecoins are pegged to the value of a national currency, Saga operates completely independently of any other asset. Pricing of the SGA tokens is based on the number issued.
From the point of introduction, Saga will be collateralized by variable reserves of major national currencies designed to replicate the SDR. However, over time, the project aims to reduce the reserves based on the growth of the currency and its acceptance as a store of value and medium of exchange. Unlike many cryptocurrencies, Saga intends to operate in compliance with all national and international financial regulations.
Saga has gained $30 million in backing from various venture firms, including Lightspeed and Mangrove Capital. However, it’s the project’s advisory team that gives it an extraordinary level of credibility. It features names such as Nobel Laureate Prof. Myron Scholes, former JP Morgan Chairman Jacob Frenkel, and former CME Chairman and the founder of financial futures, Leo Melamed.
A Stable Safe Haven in Crypto?
Saga’s economic model poses some intriguing possibilities in the event of a global recession. When the economy starts to shrink, most assets, including real estate, stocks, and bonds, begin to lose value. Governments counter these losses by pumping currencies into the market, leading to mass inflation, and loss of wealth. Individuals are left powerless as their investments and pensions dwindle.
However, not all assets lose value in a recession. Historically, the price of gold has an inverse correlation with the rest of the markets, holding or even increasing its value during times of recession. The reason for this is that investors tend to flock to gold as a safe-haven asset that has value independent of national currencies.
Bitcoin has been called digital gold but given the level of institutional investment it now attracts, it doesn’t seem likely that Bitcoin’s price will pump if the markets contract. However, the Sage monetary model is designed for stability. It can’t undergo dramatic volatility in either direction, regardless of what’s happening in the broader financial markets. Ultimately, Saga could prove to be a better store of value than gold or its digital counterpart, in the event of a recession.
The scars of the last global recession run deep, and it’s critical that we avoid another one, if at all possible. However, it’s an intriguing possibility that the evolution of crypto over the last eleven years may have brought us to a point where there’s a genuine digital safe haven that can protect from the effects that a recession will bring.
