Contrary to years of crypto hype, the world of DeFi is not separate from or insulated from the larger economy. Looking ahead, how will a recession and decentralized finance work out? https://youtu.be/KJPjtTWUzGg

1. By: www.ProfitableInvestingTips.com

2. The US is steadily moving toward an economic
recession. Looming over everything is the
possibility of a default on US debt which
would turn a recession into a depression, or
worse. Meanwhile the world of
cryptocurrencies has begun to emerge from a
dreadful crypto winter that sucked as much as
three-fourths of the previous value of crypto
tokens.

3. Many a DeFi business fell into dire straits or even
bankruptcy. Contrary to years of crypto hype,
the world of DeFi is not separate from or
insulated from the larger economy. Looking
ahead, how will a recession and decentralized
finance work out?

4. Crypto Exchanges Versus DeFi Businesses

5. After a four month runup in price, Bitcoin has
fallen back below $30,000. Bitcoin and other
cryptocurrencies follow the Nasdaq stock
market, react to interest rate changes, and the
economy in general. Something that we saw
back during the 2022 crypto winter was that far
too many DeFi businesses worked on the
premise that crypto always goes up.

6. Thus, they borrowed dollars, converted to
cryptocurrencies and lent them out. When folks
paid back their crypto the idea was that they
would be worth more in dollars than before the
transactions started. When crypto prices
plummeted that was not the case and many
businesses failed. Companies that survived
commonly changed their crypto business
plans.

7. Large crypto exchanges have gone bankrupt
because many of them followed the same
business plan based on crypto always going
up. The advantage for a properly governed
DeFi business is that it need not be totally
dependent on the value of the crypto tokens it
deals in

9. Decentralized Finance Business Is Not Bitcoin

10. .DeFi businesses use Bitcoin, other tokens, and
currencies like the US dollar in their businesses.
However, they are not Bitcoin or any other
token. A decentralized finance company has
smart contracts that enable loans between
people or business entities across the globe.
These loans involve cryptocurrencies.

11. Traditional banks engage in loans using dollars,
euros, and other currencies. When the value of
the dollar falls due to the US lowering interest
rates banks commonly make less of a profit but
they do not necessarily go out of business
(They do if they mismanage their assets such as
with Silicon Valley Bank).

12. If Bitcoin falls again in price due to a recession in
the US and world economies, smart DeFi
businesses will adjust, perhaps tighten their
belts, and continue doing business. The health
of Bitcoin in a recession might depend on
Nasdaq. The health of a competently managed
DeFi business will depend on their mix of
assets, customers, loan portfolio, and
management’s decisions.

13. Are We Going to Have a Recession?

14. When inflation becomes a problem the US Federal
Reserve raises interest rates. More often than
not, they fail to achieve the desired “soft
landing”. A soft landing is where inflation falls
to acceptable levels, employment in the
economy remains strong, and businesses do
not suffer extreme losses. The last time inflation
was as bad as it has been this last year was
more than four decades ago coming out of the
inflation-driven 1970s.

15. At that time the Federal Reserve under Paul
Volcker raised rates dramatically and
succeeded in breaking the back of inflation. The
economy went into a recession and
employment did not return to prior levels for 7
years. This time around the Fed is using a
gradual approach of raising rates by a quarter
or half percent at a time.

16. They do this based on their appraisal of how the
economy is doing. It remains to be seen if they
can avoid a huge recession but the general
consensus of economists is that we are going to
have a recession. Everyone, including DeFi
businesses, need to get ready.

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