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

Bitcoin was launched in response to the 2008 global recession. It introduces a new way of doing business without relying on the trust of third parties, such as banks, especially failing banks that are bailed out by governments at the expense of the public.

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

Bitcoin's genesis block summarizes its intent with the following embedded message:

The Times, 3 January 2009 Chancellor on the brink of implementing a second bank bailout.

But while Bitcoin leaves mining blocks unaffected and its gold-like properties attract investors seeking "digital gold," it is currently down 75% from its November 2021 high of $69,000, suggesting it Not immune to global economic forces.

Meanwhile, the entire crypto market lost $2.25 trillion over the same period, suggesting massive demand disruption in the industry.

Bitcoin’s crash comes at a time of rising inflation and hawkish central banks around the world responding to it. The Federal Reserve raised its benchmark interest rate by 75 basis points (bps) on June 15 in an effort to curb inflation that hit 8.4 percent in May.

BTC/USD daily chart source: TradingView

Additionally, the plunge has brought BTC’s movements more in sync with the tech-heavy Nasdaq Composite. Between November 2021 and June 2022, the US stock market index fell by more than 30%.

There will be more rate hikes in the future

Fed Chairman Jerome Powell noted in congressional testimony that rate hikes would continue to lower inflation, though he added that "the pace of rate hike changes will continue to be determined by incoming data and the changing economic outlook." .”

Economists polled by Reuters had previously agreed that the Fed would raise interest rates by 75 basis points in July, followed by a 0.5 percent increase in September.

London-based financial intelligence firm Informa Global Markets noted that this adds more downside potential to an already declining cryptocurrency market. The firm said that the crypto market will not bottom unless the Federal Reserve stops its "aggressive approach to monetary policy."

But given the central bank's 2 percent inflation target, a U-turn in hawkish policy seems unlikely in the near future. Interestingly, the gap between the Fed's funds rate and the Consumer Price Index (CPI) is now at its widest in history.

Fed Funds Rate vs. Inflation Source: Ecoinometrics

Bitcoin faces potential recession for first time

According to the results of a survey conducted by the British "Financial Times" among 49 economists, nearly 70% of economists believe that due to the hawkish policy of the Federal Reserve, the US economy will fall into recession next year.

In summary, a country enters a recession when its economy faces negative gross domestic product (GDP), combined with rising unemployment, falling retail sales and a prolonged decline in manufacturing output.

Notably, some 38% expect a recession to begin in the first half of 2023, while 30% expect a recession to begin between the third and fourth quarters. Additionally, another Bloomberg survey in May put the chance of a recession next year at 30%.

Next U.S. recession will start in 2023 Source: FT

Powell also pointed out at a press conference on June 22 that a recession is "certainly possible" due to "events that have occurred around the world over the past few months," namely the war in Ukraine and Russia causing a global food and oil crisis. .

These predictions could place Bitcoin ahead of a full-blown economic crisis. It behaves nothing like a safe-haven asset during periods of rising inflation, raising the possibility that it will fall along with Wall Street indexes, mostly tech stocks.

Meanwhile, the collapse of Terra, the $40 billion "algorithmic stablecoin" project, and the insolvency it caused the largest crypto hedge fund, Three Arrow Capital, has also decimated demand across the crypto space .

For example, ethereum, the second-largest cryptocurrency after bitcoin, fell more than 80% to a low of $880 amid an ongoing bear market cycle.

Likewise, other top-ranked digital assets including Cardano (ADA), Solana (SOL) and Avalanche (AVAX) have also plummeted 85% to more than 90% from their 2021 peaks.

“The crypto house is on fire and everyone is rushing to get out because people have completely lost faith in the space,” said Edward Moya, senior market analyst at online foreign exchange brokerage OANDA.

Bitcoin bear markets are nothing new

Predictions that bitcoin prices will fall below the support level of $20,000 are emerging, and Leigh Drogen, general partner and chief investment officer of digital asset quantification hedge fund Starkiller Capital, predicts that bitcoin prices will fall to $10,000, compared with the peak level. 85% drop.

However, there is little evidence of Bitcoin's outright demise, especially after Bitcoin's past six bear markets (based on its 20%+ corrections), each of which resulted in a rally beyond its previous all-time high.

BravenewCoin Liquid Index shows Bitcoin's bear market since 2011 Source: TradingView

Nick, an analyst at data resource Ecoinometrics, believes that Bitcoin is behaving like a stock market index and is still in the "middle of the adoption curve."

In an environment of rising interest rates, Bitcoin could fall further — as the S&P 500 has fallen many times over the past 100 years — but eventually recover strongly.

extract:

“Between 1929 and 2022, the S&P 500 rose 200-fold. That equates to a 6% annualized return... Some of these asymmetric bets are obvious and quite safe, like buying Bitcoin now.”

S&P 500 historical decline Source: Ecoinometrics

Most altcoins will die

Unfortunately, not all tokens in the crypto market will die. Many of these so-called alternative cryptocurrencies ("altcoins") have fallen to extinction this year. Especially for some coins with low market capitalization, the price fell by more than 99%.

Altcoins already facing nearly 100% losses in 2022 Source: Messari

Still, projects with good adoption rates and real users may stand out in the wake of a potential global economic crisis.

By far the hottest candidate is leading smart contract platform Ethereum, which dominates the layer 1 blockchain ecosystem with over $46 billion in value locked in its DeFi applications.

Ethereum Dominates Smart Contract Space Source: DeFi Llama

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

Meanwhile, older altcoins such as Dogecoin (DOGE) also have higher odds of survival, especially with rumors that Twitter may integrate with it.

Overall, a macro-dominated bear market is likely to hurt all digital assets in the coming months.

But Alexander Tkachenko, founder and CEO of digital gold trader VNX, told Cointelegraph that currencies with lower market caps, illiquidity, and higher volatility face a higher risk of crashing. He added:

“If Bitcoin and other cryptocurrencies are to regain their full strength, they need to become self-sufficient alternatives to fiat currencies, especially the U.S. dollar.”