Comparing Private Market and Crypto Resiliency in a Downturn

By: Gridline Team | Published: 09/21/2022
Est. Reading Time:
3 minutes

The notion that cryptocurrency is a safe-haven asset has long been touted by its proponents. The idea of Bitcoin as a "digital gold" that can protect investors during economic turmoil has been a popular narrative. While it's true that actual gold has historically been a haven asset during times of recession, data indicates that Bitcoin is anything but.

The COVID-19 market crash put this fact in stark relief. As the S&P500 crashed, Bitcoin fell in lock-step. If we look at more recent data, we can see that Bitcoin has not been a haven asset during the current turmoil. The S&P500 has had its worst first half in 50 years. During that same time, cryptocurrencies are down by $2 trillion.

Fortunately, some assets offer low-to-negative correlations with the stock market, making them relatively safe havens, including private equity and venture capital.

Private markets are relative safe havens

Rampant inflation, interest rate hikes, low consumer confidence, ongoing supply disruptions, and general economic malaise are the ingredients of a recession.

It's no wonder that economists from Deutsche Bank to JP Morgan have been warning for months that a recession is on the horizon. Bringing layoffs, reduced consumer spending, and business closures, a recessionary environment is an antithesis of what most companies need to thrive.

In this environment, private markets have, historically, been a haven. A Neuberger Berman Group study highlights that private equity funds fared better than public markets during the dot-com bubble of the early 2000s and the Great Financial Crisis (GFC) of 2007-2009, with a less significant drawdown and a quicker recovery. In past recessions, only 2.8% of buyout funds experienced catastrophic loss, compared to 40% of stocks.

Private market outperformance isn’t limited to just downturns, either. In the decade following the dot-com crash, the public market equivalent index's annual return was a measly 0.08%, while private equity yielded a robust 7.5% average.

Why do private markets fare so well in recessions?

Several factors combine to make private companies less exposed to economic downturns than their publicly-traded counterparts.

Private companies tend to have longer time horizons than publicly-traded companies. They're not beholden to quarterly earnings reports and the short-term thinking that comes with them. This enables them to make the long-term bets that are often necessary to weather an economic storm.

Further, private companies are often more nimble than public companies. They can make decisions quickly and without the need to obtain shareholder approval. This allows them to take advantage of opportunities that might arise in a recessionary environment.

In addition, private companies are not as dependent on the health of the overall stock market for their funding. Venture capitalists continue investing heavily in startups, despite the current economic turmoil.

So, private markets are an attractive bet if you're looking for a haven during a recession. Even smaller investors are entering private markets, which have been made more accessible with alternative investment platforms like Gridline. Gridline provides access to a curated selection of professionally managed alternative investment funds with lower capital minimums. 

That said, private equity and venture capital aren't the only assets with a low correlation to the stock market. Real estate can also provide a measure of safety during economic turmoil. This is particularly true now, as a period of consistently high inflation is driving up rent, and thus cash flow, for landlords.

The bottom line is that there are several potential safe havens, from private equity and venture capital to real estate, but cryptocurrency fails to make the cut. If you're looking to protect your portfolio during a recession, these are the assets you should look at.

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