Economic Downturns, Government Response, and the Evolving Role of Crypto Assets

The Great Depression and the Birth of the U.S. Social Safety Nets

When the stock market crashed in 1929, the Great Depression began. Poverty, company closures, and severe unemployment were the results. This decline was the result of multiple factors. These included bank runs, high leverage, excessive speculation, income inequality, and inadequate financial regulation.

The financial system's fragility was exposed by the crash. The situation was made worse by the government's response. The government cut spending, raised taxes, and restricted commerce.  Insufficient funds were injected into the system by the Federal Reserve.

The crisis ultimately forced reform in the United States. The New Deal was started by President Franklin D. Roosevelt. This featured initiatives such as Social Security, the Federal Deposit Insurance Corporation (FDIC), and the Public Works Administration (PWA). The basis of contemporary American social and financial policy was influenced by these shifts.

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1973 Oil Embargo and the Rise of Stagflation

In 1973, the United States faced yet another major problem with the OPEC oil embargo. Oil exports to the United States were stopped by OPEC nations due to their support of Israel during the Yom Kippur War. The cost of oil skyrocketed. The production rate slowed. When growth stalled, inflation rose.

High prices coupled with slow economic growth, or stagflation, became the defining feature of this period. This recession was distinct from others. Generally, prices fall during recessions. Energy costs, however, had an impact on practically every organization.

In response, Paul Volcker, the chairman of the Federal Reserve, increased interest rates in the latter part of the 1970s. The economy will suffer short-term consequences from this action. Later on, nevertheless, it contributed to a decrease in inflation. The incident demonstrated how complicated economic reactions might be triggered by global events, occasionally requiring a swift change in monetary policy from the government. 

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Covid-19 and the Fastest Recession Recovery

Covid-19 caused one of the most severe economic shocks in American history in 2020. Quarantines, travel restrictions, and lockdowns stopped business operations. Supply chains broke down. Fear, unemployment, and restrictions caused demand to decline.

Although the recession lasted only two months on paper, its impact stretched for years. Governments around the world responded quickly. The U.S. cut interest rates to near zero and provided stimulus checks. Other measures included emergency lending, business loans, and unemployment support.

Unlike the slow response of the 1930s, the 2020 reaction was fast. The result was a sharp rebound in financial markets. Crypto, in particular, saw a massive rally as liquidity poured into the system. This showed how quick government action can affect risk assets like crypto.

Crypto Regulation During a Recession

In a future U.S. recession, crypto regulation could become more important. The current Trump administration has taken a more relaxed stance on crypto. It has rolled back several rules from the Biden era. For example, the IRS rule on defining brokers has been reversed. The SEC has dropped some lawsuits. Stablecoin regulation is also becoming more likely.

If a recession happens under this administration, crypto could benefit. Lighter enforcement, fewer restrictions, and possible new laws that support stablecoins may encourage more investment. This could drive up prices, at least in the short term. But this depends on broader market conditions and investor sentiment.

Tariffs also play a role during recessions. Trade wars and tariff hikes can increase costs and reduce market confidence. In the past, announcements of tariffs led to drops in crypto prices. Rollbacks, on the other hand, have occasionally sparked rallies.

During the Great Depression, protectionist trade policies made things worse. That history serves as a warning. In today’s world, any sudden tariff changes, especially from unpredictable leadership, can shake markets. Crypto is not immune. While it may not be directly tied to trade, the overall impact on investor confidence and liquidity still matters.

The Fed’s Role and Interest Rate Policy

In any recession, the Federal Reserve is a major player. It regulates the money supply and interest rates. Borrowing becomes more affordable when the Fed reduces interest rates. This promotes risk-taking and expenditure. The converse occurs when rates are raised.

In general, cryptocurrencies benefit from low interest rates. Low-cost capital for cryptocurrencies surged in 2020–2021. This sparked one of its biggest bull runs. If the Fed lowers interest rates in a future recession, cryptocurrency might increase again. If the Fed raises interest rates to fight inflation, cryptocurrency may fall as borrowing costs rise.

However, the effect is typically not immediate. Another factor is the level of confidence investors have in the economy as a whole. Sentiment and liquidity are important.

In a recession, financial assistance programs like stimulus cheques and bailouts can be reinstated. The COVID-19 outbreak demonstrated how financial markets might be swiftly impacted by direct payments to individuals. Such actions have previously assisted in averting more severe recessions.

These measures do not specifically target cryptocurrency, but the increased liquidity frequently increases riskier assets. The financial sector is stabilized by initiatives like emergency loans and quantitative easing. Crypto tends to gain when investor confidence increases.

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The bitcoin market is still in its infancy. It reacts strongly to changes in liquidity and policy. Preparing for a recession involves lowering risk and preserving flexibility.

Avoid relying solely on a single country, chain, or platform. Maintain your money on both decentralized and centralized platforms. Self-custody should be used wherever feasible. Keep track of your transactions in case reporting or tax laws change unexpectedly.

Open several fiat on- and off-ramps as well. Prior to limitations making it more difficult, had access to exchanges such as Coinbase or Kraken. Act before a catastrophe arises.

During a recession, crypto lending can become risky. Borrowers might face sudden losses due to falling prices. Lenders may see liquidations fail if liquidity dries up. Even automated systems can break under stress.

It’s safer to reduce leverage. Watch for signs of low liquidity. Avoid risky platforms with poor transparency. Even stable protocols can experience slippage or default in hard times.

If you expect a recession, consider transferring a portion of your holdings into safe-haven assets. US Treasury bonds and US currencies have historically performed well during recessions. While they may not offer substantial advantages, these help protect your portfolio from fluctuations.

Crypto is exciting and full of potential. But in rough economic periods, stability and cash preservation matter more.

Final Thought

Recessions reshape policy, markets, and sentiment. They test systems and force change. For crypto, the outcome depends on how governments respond. Watching regulation, Fed policy, and macro trends will help you stay ahead. Most importantly, stay flexible and ready to adapt.