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

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Bitcoin (BTC) was a response to the 2008 global recession. It introduced a new way of transacting without the trust of third parties, such as banks, especially failed banks that were nevertheless bailed out by the government at the expense of the public.

Satoshi Nakamoto wrote in 2009, “Central banks should be trusted not to deface currency, but the history of fiat currencies is replete with breaches of that trust.”

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Bitcoin’s Genesis Block summarizes the intent with the following embedded message:

Times 03/Jan/2009 Chancellor on verge of second bailout for banks.

But while bitcoin mining continues to elude the bloc, and its gold-like assets have attracted investors looking for “digital gold,” its current 75% decline from its November 2021 high of $69,000 suggests that It is not immune to global economic forces.

Meanwhile, the entire cryptocurrency market lost $2.25 trillion in the same period, indicating a massive demand destruction in the industry.

Bitcoin’s crash appeared during a period of rising inflation and prompted a sharp reaction from global central banks. Notably, the Federal Reserve raised its benchmark rates by 75 basis points (bps) on June 15 to contain inflation that hit 8.4% in May.

BTC/USD daily price chart. Source: TradingView

Furthermore, the crash caused BTC to align even further with the performance of the tech-heavy Nasdaq Composite. The US stock market index fell more than 30% between November 2021 and June 2022.

Further hike in rates

Fed Chairman Jerome Powell noted in his congressional testimony that his rate hikes will continue to moderate inflation, though adding that “the pace of those changes will continue to depend on the coming data and the evolving outlook for the economy.”

The statement came after a Reuters poll of economists agreed that the Fed would raise benchmark rates by 75 bps in July and follow up with a 0.5% increase in September.

London-based financial intelligence firm Informa Global Markets said it adds more downside potential to an already falling crypto market, adding that it will not come down until the Fed changes its “aggressive approach to monetary policy”. does not reduce

But given the central bank’s 2% inflation target, a U-turn on hawkish policies is unlikely in the near future. Interestingly, the gap between the Fed’s funds rates and the Consumer Price Index (CPI) is now the largest on record.

Fed funds rate vs inflation. Source: Econometrics

Bitcoin faces first possible recession

According to a survey of 49 respondents conducted by the Financial Times, nearly 70% of economists believe the US economy will hit a recession next year.

In short, a country enters a recession when its economy faces negative gross domestic product (GDP), coupled with rising unemployment levels, declining retail sales, and low manufacturing output for extended periods.

Notably, around 38% expect a recession to begin in the first half of 2023, while 30% expect the same to happen during the Q3-Q4 session. Furthermore, a separate poll conducted by Bloomberg in May shows a 30% chance of a recession next year.

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

Powell also noted in his June 22 press conference that a recession is “definitely a possibility” due to “events of the past few months around the world”, i.e. the Ukraine-Russia war that created a worldwide food and oil crisis. has done.

The predictions put bitcoin at risk before a full-blown economic crisis. And the fact that nothing has behaved like a safe-haven asset during periods of rising inflation makes it more likely that the Wall Street index, as well as mainly tech stocks, will continue to decline.

Meanwhile, the collapse of Terra, a $40 billion “algorithmic stablecoin” project, and it led to bankruptcy issues at Three Arrows Capital, the largest crypto hedge fund, also destroyed demand in the crypto sector.

For example, Ether, the second-largest cryptocurrency after bitcoin, fell over 80% to a low of $880 during the ongoing bear cycle.

Similarly, other top-ranking digital assets, including Cardano (ADA), Solana (SOL), and Avalanche (AVX), fell in the 85% to more than 90% range from their 2021 peak.

Edward Moya, a senior market analyst at OANDA, an online forex brokerage, said, “The crypto house is on fire, and everyone is just, you know, running to get out because the space completely lost faith. Is.”

BTC bear market is nothing new

An impending bearish prediction for bitcoin envisions it breaking below its $20,000-support level, with Leigh Drozn, general partner and CIO at Starkiller Capital, a digital asset quantitative hedge fund, predicting that the coin will be 85 percent off its peak. % down to $10,000. Level.

However, there is little evidence for bitcoin’s total death, especially after the coin’s collision with six bear markets in the past (based on its more than 20% corrections), each leading to a rally above its previous record high. is leading.

BravenewCoin Liquid Index featuring bitcoin’s bear market since 2011. Source: TradingView

Nick, an analyst at data resource Econometrics, sees bitcoin behaving like a stock market index, yet “in the middle of an adoption curve”.

Bitcoin is likely to fall further in a high interest rate environment – ​​just as the US benchmark S&P 500 has dropped several times over the past 100 years, only to recover strongly.

Part:

“The S&P500 is up 200x between 1929 and 2022. That’s something like a 6% annual rate of return […] Some of those asymmetric bets are obvious and very safe, like buying bitcoin right now.”
The decline of the S&P 500 throughout its history. Source: Econometrics

Most Altcoins Will Die

Unfortunately, the same cannot be said of all coins on the crypto market. Many of these so-called alternative cryptocurrencies, or “altcoins,” have fallen to their death this year. With some low-cap coins in particular, more than 99% of the depreciation was recorded.

Altcoins suffered almost 100% losses in 2022. Source: Mesari

Still, projects with healthy adoption rates and real users may come out on top in the face of a potential global economic crisis.

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

Ethereum leads the smart contracts sector. Source: Defi Llama

Other chains including Binance Smart Chain (BSC), Solana, Cardano and Avalanche may also attract users as an alternative to ensuring demand for their underlying tokens.

At the same time, older altcoins like Dogecoin[DOGE]It also seems to have a higher chance of survival, especially with speculation about a possible Twitter integration in the pipeline.

Overall, a macro-led bear market will hurt all digital assets across the board in the coming months.

But coins with a low market cap, dismissive liquidity and high volatility will be at higher risk of collapse, Alexander Tkachenko, founder and CEO of digital gold dealer VNX, told Cointelegraph. He added:

“If bitcoin and other cryptocurrencies are to return to their full potential, they need to become a self-sustaining alternative to fiat currencies, especially the US dollar.”

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, so you should do your own research when making a decision.