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How will Bitcoin behave in a financial crisis?

Bitcoin is one of our world's youngest forms of currency, born in 2008. It's no secret that the workings of our global economy are convoluted. The value of our assets and our collective economic stability are beholden to the behavior of financial institutions that reach beyond our family's savings account. That is why, in the midst of the Great Recession, Satoshi Nakamoto conceived Bitcoin. The concept of a pee-to-peer currency without any entanglement in global financial institutions was attractive in the economic climate of government bailouts and bank failure that defined the late 2000's. The bitcoin has sparked curiosity and gained notoriety in the modern marketplace, but the promise of its origin begs the question: how will bitcoin behave in the next financial crisis?

Bitcoin has earned its title as "digital gold" over the years. Like gold, Bitcoin holds a value that exists outside of banking institutions. We know that gold has been one of the most resilient assets in the face of economic downturn historically, so does that mean Bitcoin will fair similarly? The answer isn't quite that simple.

Bitcoin does share some of the same properties as gold. For example Bitcoin is scarce. Just like a precious metal, Bitcoin cannot be arbitrarily created or destroyed. It must be mined via digital means. There are only 21 million total Bitcoins to be mined, so they hold a more stable value than paper currency in their scarcity. In addition, they are also durable, like metal, and made of interchangeable units. These properties all sound like Bitcoin might be a safe bet.

However, to predict how Bitcoin will behave in a crisis, we have to look at human behavior during a financial crisis. A financial downturn compromises people's confidence in financial institutions. This can result in a "bank run", just like during the Great Depression. When the future of someone's assets are uncertain, they liquidate them as quickly as possible. The riskier the asset, the sooner it is liquidated during a recession.

Bitcoin might seem like a stable asset to keep in a downturn, but consumer behavior is not always rational. An asset's stability depends on its perception. Bitcoin is a new creation that isn't part of traditional financial systems. This may contribute to the perception that it is a high risk or illegitimate asset during a financial crisis. This concept is called market risk. The value of Bitcoin is determined by supply and demand, so if demand drops due to a liquidation frenzy, its value is in danger.

Since it's barely over 10 years old, the future of Bitcoin in the face of a financial crisis is still uncertain. Some of the very factors that make the Bitcoin a more stable choice are also what drives its market risk. When money is devalued, you could argue consumers will run to alternatives like Bitcoin to make it through the recession. That being said, crawling towards a more familiar option is also a likely scenario when searching for stability during the next big crash.

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