Could a financial crisis end crypto’s bull run?

These are heady times for the blockchain and crypto sector.

In the first half of 2024, spot Bitcoin ETFs debuted on Wall Street, a major U.S. presidential candidate came out in favor of cryptocurrencies, and BTC experienced its fourth quadrennial “halving” and reached new market highs.

Moreover, Ether — the world’s second-largest cryptocurrency — stands on the verge of another milestone, with an Ether ETF potentially launching in the U.S. as early as July 8. 

But crypto doesn’t exist in a vacuum, and the outside world has become a less secure place, wracked by several major wars, extreme weather events and persistent monetary inflation.

Given the circumstances, a cross-border meltdown in the traditional financial system by year’s end isn’t unthinkable.

So, it bears asking: If a TradFi crisis does materialize, what becomes of the latest crypto bull run? 

TradFi upheaval “cannot be ruled out”

“It’s definitely possible that major corrections in financial markets will happen before the end of the year, although they might not lead to a full-blown crisis,” Paolo Tasca, an economist and founder of the University College London Centre for Blockchain Technologies, tells Magazine.

The trigger? Probably a correction in AI stocks, “but the main market to look at is debt, in my opinion,” says Tasca. The U.S. has been running massive fiscal deficits, which may make interest rate cuts unlikely, and as a result, the bond and equity markets could “suffer from the continued restrictive monetary policy.”

Ongoing inflation, geopolitical tensions, as well as “the speculative nature of certain asset bubbles, including those in the tech and AI sectors,” are potential catalysts, adds Yu Xiong, a professor and director of the Surrey Academy for Blockchain and Metaverse Applications at the Surrey Business School. Xiong tells Magazine that “a global financial crisis in 2024 cannot be ruled out.”

Elsewhere, global equity prices remain high as measured by the Shiller ratio, which stood at 35.64 on June 17, more than double its historic mean.

“Equity markets, particularly in tech and growth sectors, are already overvalued — except for AI. A correction could trigger broader market instability,” claims Nigel Green, CEO and founder of the deVere Group.

Also, “ongoing conflicts, such as Gaza-Israel, or heightening geopolitical tensions, such as the Taiwan issue, could lead to economic disruptions and investor uncertainty,” Green tells Magazine. 

“Seek refuge in decentralized assets”

So what should one expect crypto-wise if the entire global economy heads south?    

“Historically, during the onset of financial crises, all assets, including cryptocurrencies, see a sell-off as investors seek liquidity,” says Xiong. Crypto market prices could plummet along with everything else. 

In the mid-term, though, after the initial panic abates, there might be a “recovery phase where investors seek refuge in decentralized assets, potentially reigniting the crypto bull run,” he continues.

In the longer term, though, the benefits of blockchain-based technologies should prevail: “Due to the strong development of AI, more people will push for the use of blockchain and other decentralized technologies, empowering individuals.”

Therefore, while cryptocurrencies may experience instability with a TradFin crisis in 2024, “the likelihood of a major (crypto) crash is not high,” says Xiong. “Indeed, in the long term, such a crisis could significantly boost crypto adoption.” 

“Impossible to predict”

Many agree that economic crises are cyclical events, and for that reason, a historical perspective can be useful. 

Asked about a global economic crisis in 2024, Mark Higgins, author of Investing in U.S. Financial History: Understanding the Past to Forecast the Future, a book that explains the economic forces that have shaped U.S. financial history since 1790, tells Magazine: 

“The only thing I will say is if a crisis occurs, it is most likely to be caused by a risk that most people do not see — rather than one that people fear most.”

The Panic of 1819 traced its origins to the eruption of Mount Tambora in 1815 and the crop failures that followed. The Panic of 1907 was set off by the 1906 San Francisco earthquake. The global COVID-19 pandemic ignited the market panic of March 2020. Few, if any, of those financial detonations were anticipated, Higgins recounts.

Where do things stand today? “Current vulnerabilities to a financial crisis are moderately elevated today due to inflationary pressures and tight monetary policy, but it is impossible to predict if and when one will occur,” opines Higgins.

Is BTC a safe haven?

Some observers maintain that crypto is — or is on the verge of becoming — an uncorrelated financial asset, which means that when stocks and bonds plummet, crypto won’t necessarily sink as well. But such thinking could be wishful. 

“Crypto has shown to be massively procyclical so far,” notes Tasca, and he wouldn’t expect anything to be different in 2024: 

“The academic literature doesn’t support the notion that BTC is a safe haven: if stocks go down and monetary or fiscal policy becomes more restrictive, I expect crypto to go down too.”

“In the event of a sell-off, crypto would join TradFi assets in a sharp decline as these are bundled together in the initial shock,” Lucas Kiely, chief investment officer of digital wealth platform Yield App, tells Magazine. “But BTC could recover quicker due to its ‘flight to quality’ nature relative to other crypto assets.” 

“Cryptocurrencies may not have completely detached from or become anti-cyclic with the rest of the risk-on category,” Marc Fleury, CEO and co-founder of Two Prime — a financial technology company that focuses on the financial application of crypto to the real economy — tells Magazine, “but it has proven in the past cycle that it can sometimes function as a safe haven.”

When Silicon Valley Bank collapsed in March 2023 — the second-largest bank failure in U.S. history — global stock markets trembled. But BTC, contrary to some expectations, “rallied,” Fleury recounts.

More Americans own crypto “than own dogs”

The 11 new spot Bitcoin ETFs approved by the SEC in January proved wildly popular with investors in the first half of 2024. BlackRock’s iShares Bitcoin Trust ETF alone had gathered $20 billion in assets by mid-June, marking one of the most spectacular ETF launches ever. 

Adoption continues apace, and crypto’s wider user base could provide a bulwark if and when the traditional financial world starts trembling, some believe.

“In the near term, cryptocurrencies will correlate with the gyrations of all risk assets, but as adoption continues to grow — more Americans now own crypto assets than own dogs — they should more easily protect holders in a global stock market crash,” Paul Giordano, vice president of digital asset management at Marathon Digital, one of the world’s largest Bitcoin mining firms, tells Magazine.

Green is also positive regarding crypto’s ability to withstand global upheaval: “If TradFi falters, investors could view crypto as a hedge against traditional financial instability, leading to continued investment and potentially driving prices higher.” 

What if the internet fails?

Perhaps a more pertinent question is whether Bitcoin and other cryptocurrencies could survive an enduring TradFi crisis, which could be brought on by a geopolitical disruption like a war. 

Cryptocurrencies need the internet to be traded, which in turn requires electricity and telecom providers. If geopolitical tensions deepen and “bad actors” engage in cyber or physical attacks upon critical infrastructure like power stations and data centers, wouldn’t cryptocurrencies go dark as well?

“Bitcoin sits atop one of the most vulnerable systems,” notes Reza Bundy, CEO of Atlas Capital Team. Should geopolitical tensions boil over, he expects “asymmetric” strikes on power networks, among other infrastructure. 

“Armies won’t be marching across borders. Rather, attacks will be made on the banking sector and electrical providers.” Crypto access could be knocked out over large parts of the world.

If a TradFi collapse does occur in 2024, for whatever reason, historian and author Higgins doesn’t think Bitcoin is likely to provide holders much help, though he acknowledges that he does not follow cryptocurrencies closely. 

“In my opinion, cryptocurrencies are little more than a speculative asset that will run their course eventually. The closest historical parallel in U.S. history was the proliferation of state-chartered bank notes during the wildcat banking years of the mid-1830s until the mid-1860s following the passage of the National Bank Laws.”

During this era, the value of a “dollar” varied substantially based on the underlying strength of the state bank issuing the banknote, Higgins continued, adding: 

“Cryptocurrencies are not much different, in my opinion. Unless this trend is truly unique — and there is nothing in financial history to suggest that it is — it will run its course.”

More use cases needed

Others think the crypto industry needs to develop more compelling use cases if it is to survive a prolonged TradFi crisis and beyond.

“Crypto adoption has nothing to do with financial contingencies but with the development of proper practical use cases, which so far have been scarce,” says Tasca. “Long-term growth will not be affected by short-term speculative trends.”

The crypto industry may need to think more realistically about how it fits into the TradFi world. “Self-sovereignty” is a crypto illusion, asserts Bundy. If the global economy collapses, crypto isn’t going to save you.

He suggests that crypto can be part of the solution for a safer, more equitable world, but it is not “the” solution.

The industry could help itself begin by focusing more on real-world assets, i.e., cryptocurrencies backed by assets from the physical world, such as real estate and commodities, or traditional financial assets like treasury bonds, says Bundy. 

Predicting the unpredictable?

Of course, trying to predict economic crises and panics may just be a fool’s errand, Higgins implies. Economist and Nobel laureate Paul Samuelson once famously joked that the stock market “had predicted nine of the past five recessions.”

The fact that predictions have long outstripped actual occurrences has been the source of some mirth, Green acknowledges, underscoring the difficulty of actually forecasting such events. But that doesn’t mean one must necessarily shy away from them:

“While speculative, these predictions can still be useful for risk management. They prompt investors to diversify portfolios and consider hedging strategies to protect against potential downturns.”

And the fact is that many, if not most, experts don’t expect global financial collapse any time soon.

“I don’t see any reason to expect a global financial crisis,” David Yermack, Albert Fingerhut Professor of Finance and Business Transformation at New York University, tells Magazine. “The economy is strong, and markets are near all-time highs. Most of the world’s financial problems are confined to China.”

In any event, “It’s hard to draw any connection between crypto prices and the world economy,” says Yermack “There’s little theoretical reason to expect one. Any forecast about crypto prices should probably be independent of global market conditions.” 

“We are in a much stronger position in the real estate market, and bank balance sheets are more stable,” Elvira Sojli, associate professor of finance at UNSW Business School, tells Magazine. “I do not think a global financial crisis is looming. Politics is much more likely to drag us into a crisis.”

Still, others believe that if a calamity were to arise, crypto and blockchain’s core attributes, including decentralization, security, transparency and traceability, should ensure its survival. 

“While a TradFi crisis could temporarily derail the crypto bull run, the fundamental strengths and unique value propositions of blockchain and crypto technologies could result in a stronger, more resilient adoption trajectory in the long term,” says Xiong.

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Andrew Singer

Andrew Singer has been a regular contributor to Cointelegraph since October 2019. He has been a professional business writer and editor for more than 30 years, including 25 years as founder and editor-in-chief of Ethikos: The Journal of Practical Business Ethics, which still publishes. In 2017 he obtained a Master’s degree in statistics from Columbia University — which spurred his interest in AI, machine learning, and blockchain technology. He currently lives in Peekskill, New York and likes to hike in the Hudson Highlands.