On the brink of recession: Can Bitcoin survive its first global economic crisis?

On the brink of recession: Can Bitcoin survive its first global economic crisis? – Mail Bonus

Bitcoin (BTC) was a response to the global recession of 2008. It introduced a new way of doing business without being dependent on the trust of third parties, such as banks, especially declining banks, which were nevertheless rescued by the government at the expense of the public.

“The central bank must be trusted not to devalue the currency, but the history of fiat currencies is full of breaches of that trust,” Satoshi Nakamoto wrote in 2009.

The Bitcoin Generation Block summarizes the purpose of the following embedded message:

The Times 03 / Jan / 2009 Chancellor on the brink of another bailout for banks.

But while Bitcoin keeps mining blocks untouched and its gold-like assets have attracted investors looking for “digital gold”, its current 75% decline from the $ 69,000 high in November 2021 shows that it is not immune to global economic forces.

At the same time, the entire cryptocurrency market lost $ 2.25 trillion over the same period, indicating a massive destruction of demand in the industry.

The collapse of Bitcoin manifests itself in a period of rising inflation and the hawkish reaction of the world central bank to it. In particular, the Central Bank raised its benchmark interest rate by 75 basis points (bps) on 15 June to curb inflation, which reached 8.4% in May.

BTC / USD daily price. Source: TradingView

Furthermore, the collapse made BTC even more in line with the performance of the technologically advanced Nasdaq Composite. The US stock market index fell by over 30% between November 2021 and June 2022.

More interest rate hikes ahead

Governor Jerome Powell noted in his testimony in Congress that their rate hikes would continue to reduce inflation, although he added that “the pace of these changes will continue to depend on the data and the development outlook for the economy.”

The statement came in the wake of a Reuters poll of economists who agreed that the central bank would raise its benchmark interest rate by another 75 basis points in July, followed by a 0.5% rise in September.

It adds more potential to a declining cryptocurrency market, said Informa Global Markets, a financial information firm in London, and said it would not bottom out until the Fed reduced its “aggressive monetary policy approach”.

But a U-turn on hawkish policy seems unlikely in the near future, given the central bank’s 2% inflation target. It is interesting to note that the gap between the Central Bank’s interest rates and the consumer price index (CPI) is now the largest ever measured.

Fed funds interest rates against inflation. Source: Ecoinometrics

Bitcoin is facing the first possible downturn

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

To put it another way, a country is in a recession when its economy is facing negative GDP (GDP), along with rising unemployment, declining retail sales and declining output over the long term.

Interestingly, about 38% expect the contraction to begin in the first half of 2023, while 30% expect the same to happen in the third and fourth quarters. In addition, a special survey conducted by Bloomberg in May shows a 30% chance of a recession next year.

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

Powell also noted at his June 22 press conference that the recession was “certainly a possibility” due to “the events of recent months around the world,” ie. the war between Ukraine and Russia that has caused food and oil crises around the world.

Forecasts stop putting Bitcoin before a complete economic crisis. And the fact that it has not behaved like a safe haven during a period of rising inflation increases the likelihood that it would continue to fall in line with the Wall Street indices, primarily tech stocks.

Meanwhile, the collapse of Terra, a $ 40 billion “algorithmic stablecoin” project, and the one that led to the bankruptcy of Three Arrow Capital, the largest cryptocurrency hedge fund, has also destroyed demand in the cryptocurrency industry.

For example, Ether, the second largest cryptocurrency after Bitcoin, fell more than 80% to a low of $ 880 on the current bear ring.

Similarly, other top digital assets, including Cardano (ADA), Solana (SOL) and Avalanche (AVAX), fell between 85% and over 90% from the 2021 peak.

“The crypt house is on fire and everyone is just, you know, rushing to the exit because it’s just completely lost confidence in the space,” said Edward Moya, a senior marketing analyst at OANDA, an online currency brokerage.

BTC bear markets are not used

Bear forecasts for Bitcoin assume the price will drop below the $ 20,000 support level, as Leigh Drogen, a general partner and CIO at Starkiller Capital, a quantitative hedge fund for digital assets, expects the currency to reach $ 10,000, which is 85% down from the maximum. ladder.

However, there is little evidence of a complete demise of Bitcoin, especially after the currency’s collision with six bear markets (based on 20% plus adjustments) in the past, each of which led to an increase above the previous record high.

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

Nick, an expert at Ecoinometrics’ data resource, sees Bitcoin behaving like a stock market index, still in the “middle of the adoption process.”

Bitcoin is likely to fall further in a higher interest rate environment – similar to the US benchmark S&P 500, which has fallen many times over the last 100 years, only to recover sharply.

Brot:

“Between 1929 and 2022, the S & P500 rose 200x. That’s something like a 6% annual return. […] Some of these asymmetrical bets are obvious and fairly secure, like buying Bitcoin now.

S&P 500 cancellations throughout its history. Source: Ecoinometrics

Most altcoins will die

Unfortunately, the same cannot be said for all currencies in the cryptocurrency market. Many of these so-called non-traditional cryptocurrencies, or “altcoins”, have died this year. With some small coins, in particular, records over 99% price reduction.

Altcoins that were swept suffered almost a 100% loss in 2022. Source: Messari

Nevertheless, projects with a healthy adoption rate and real users could come to the fore in the wake of a possible global economic crisis.

The top candidate to date is Ethereum, the leading smart contract platform, which dominates a single-blockchain ecosystem with over $ 46 billion locked in its DeFi applications.

Ethereum leads the smart contract sector. Source: DeFi Llama

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

At the same time, older altcoins like Dogecoin (DOGE) also have a better chance of surviving, especially with speculation about possible Twitter integration in the pipeline.

Overall, the macroeconomic bear market is likely to damage all digital assets in the coming months.

But currencies with lower market values, declining liquidity and more volatility will be at greater risk of collapsing, Alexander Tkachenko, founder and CEO of VNX, the digital gold seller, told Cointelegraph. He added:

“If Bitcoin and other cryptocurrencies want to return to full power, they need to become sustainable alternatives to fiat currencies, especially the US dollar.”

The views and opinions expressed herein are those of the authors only and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading business involves risk, you should conduct your own research when making a decision.