On the Brink of Recession: Can Bitcoin Survive Its First Global Economic Crisis?

Bitcoin (BTC) was a response to the global downturn in 2008. It introduced a new way of doing transactions without relying on the trust of third parties, such as banks, especially failing banks that were always bailed out by the government at the expense of the public.

“You have to trust the central bank not to depreciate the currency, but the history of fiat currencies is full of breaches of this trust”, wrote Satoshi Nakamoto in 2009.

Bitcoin’s genesis block sums up the intent with the following embedded message:

The Times 03/Jan/2009 The Chancellor is about to bail out the banks.

But while Bitcoin bestows the unflappable mining blocks and its gold-like properties have provided investors seeking “digital gold,” its current 75% decline from highs of $69,000 in November 2021 demonstrates that it is not immune to global economic forces.

Simultaneously, the entire cryptocurrency market lost $2.25 billion over the same period, hinting at a large-scale demand destruction in the industry.

Bitcoin’s crash emerged during the period of rising inflation and the hawkish response from global central banks. In particular, the Federal Reserve raised its key rates by 75 basis points (bp) on June 15 to curb inflation, which reached 8.4% in May.

BTC/USD daily price chart. Source: Trading View

Additionally, the crash left the BTC trend even more in sync with the performance of the tech-heavy Nasdaq Composite. The US stock index fell more than 30% between November 2021 and June 2022.

More rate hikes to come

Fed Chairman Jerome Powell noted in his testimony to Congress that their rate hikes continue to bring inflation down, while adding that “the pace of these changes has occurred based on incoming data and the evolution of “the outlook for the economy”.

The statement followed a Reuters poll of economists who agreed the Fed would hike its benchmark rates another 75 basis points in July and follow up with a 0.5% hike in September.

This adds further downside potential to an already declining cryptocurrency market, noted Informa Global Markets, a London-based financial intelligence firm, saying it will not bottom until the Fed has abolished its “aggressive approach to monetary policy”.

But a reversal of hawkish policies seems unlikely in the near term given the central bank’s 2% inflation target. Interestingly, the spread between the Fed Funds Rate and the Consumer Price Index (CPI) is now the widest on record.

FEED

Fed funds rate versus inflation. Source: Econometrics

Bitcoin Faces Potential First Pullback

Nearly 70% of economists believe the US economy will shrink next year due to a hawkish Fed, according to a Financial Times survey of 49 respondents.

To recap, a country enters a recession when its economy faces negative gross domestic product (GDP), associated with rising unemployment levels, falling retail sales, and falling manufacturing output for a period of time. prolonged.

Notably, around 38% expect the retrocession to begin in the first half of 2023, while 30% expect the same to have adapted during the Q3-Q4 session. Moreover, a separate survey conducted by Bloomberg in May shows a possibility of a 30% pullback next year.

Chart

The next retirement in the United States will begin in 2023. Source: Financial Times

Powell also noted during his June 22 press conference that regression is “certainly a possibility” due to “events of the last few months around the world”, i.e. the Ukraine-Russia war which caused a worldwide food and oil crisis.

Predictions risk putting Bitcoin ahead of a full-fledged economic crisis. And the fact that it hasn’t behaved as an active safe haven during the period of rising inflation increases the likelihood that it will continue to fall alongside Wall Street indices, primarily tech stocks.

Meanwhile, the collapse of Terra, a $40 billion “algorithmic stablecoin” project, and which led to insolvency issues at Three Arrow Capital, the largest crypto hedge fund, also destroyed demand. in the cryptocurrency industry.

For example, Ether, the second largest cryptocurrency after Bitcoin, has fallen over 80% to a low of $880 during the current bear cycle.

Similarly, other top digital assets including Cardano (ADA), Solana (SOL) and Avalanche (AVAX) have plunged 85% to over 90% from their 2021 highs.

“The house of crypto is on fire, and everyone is racing for the exits because there’s just a complete loss of confidence in the space,” said Edward Moya, senior market analyst at OANDA, a online currency brokerage company.

BTC bear markets are nothing new

Incoming bearish predictions for Bitcoin envision the price falling below its $20,000 support level, with Leigh Drogen, General Partner and CIO of Starkiller Capital, a quantitative digital asset hedge fund, forecasting the coin to hit $10 $000, down 85% from its peak level.

However, there is little evidence of Bitcoin’s complete demise, especially after the coin’s confrontation with six bear markets (based on its corrections of more than 20%) in the past, each leading to a rally at the – above the previous record.

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BravenewCoin Liquid Index with the Bitcoin bear market since 2011. Source: TradingView

Nick, an analyst at Data Resource Ecoinometrics, sees Bitcoin behaving like a stock index, still “in the middle of an adoption curve.”

Bitcoin is likely to decline further in a higher interest rate environment, similar to how the US benchmark S&P 500 has fallen multiple times over the past 100 years, only to recover strongly.

Excerpts:

Between 1929 and 2022, the S&P500 is multiplied by 200. That’s something like a 6% annualized rate of return […] Some of these asymmetrical bets are obvious and quite safe, like buy Bitcoin now.

Chart

The declines of the S&P 500 throughout its history. Source: Econometrics

Most altcoins will die

Unfortunately, the same cannot be said for all coins in the cryptocurrency market. Many of these so-called alternative cryptocurrencies, or “altcoins,” have fallen this year. With some low-cap coins, in particular, seeing price drops of over 99%.

Chart

Bloating altcoins suffered nearly 100% losses in 2022. Source: Messari

Nevertheless, projects with healthy adoption rates and real users could come out on top in the wake of a possible global economic crisis.

The top contender so far is Ethereum, the leading smart contract platform, which dominates the layer-1 blockchain ecosystem with over $46 billion locked in its DeFi applications.

eth

Ethereum is the industry leader in smart contracts. Source: DeFi Lama

Other chains, including Binance Smart Chain (BSC), Solana, Cardano and Avalanche, could also attract users as alternatives, guaranteeing demand for their underlying tokens.

Meanwhile, older altcoins such as Dogecoin (DOGE), also have a higher chance of surviving, especially with speculation about a possible integration of Twitter into the pipeline.

Overall, a macro bear market will most likely hurt all digital assets in the coming months.

But coins with a lower market capitalization, dismissive liquidity and higher provision will be more at risk of collapse, Alexander Tkachenko, founder and CEO of VNX, a digital gold merchant, told Cointelegraph. It is added:

If Bitcoin and other cryptocurrencies are to regain their full power, they must become self-sustaining alternatives to fiat currencies, especially the US dollar.

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