Will Bitcoin be able to survive its first global economic crisis?

Will Bitcoin be able to survive its first global economic crisis?

Bitcoin (BTC) was a response to the global recession of 2008. It introduced a new way to transact without relying on trusted third parties such as banks, particularly failed banks. which, however, were bailed out by the government at public expense.

“You have to trust the central bank not to debase the currency, but the history of fiat currencies is littered with violations of that trust,” wrote Satoshi Nakamoto in 2009.

The bitcoin genesis block summarizes the intent with the following embedded message:

The Times January 3, 2009 Chancellor on brink of second bank bailout

But although bitcoin continues to mine blocks without flinching, and its gold-like properties have attracted investors seeking “digital gold”, its current 75% drop from its highs of $69,000 in November 2021 shows that it is not immune to global economic forces.

Simultaneously, The entire cryptocurrency market lost $2.25 trillion in the same period, indicating large-scale demand destruction in the sector.

The bitcoin crash appeared during the period of rising inflation and the response of global central banks to it. In particular, the Federal Reserve raised its reference interest rates by 75 basis points (bp) on June 15 to curb inflation that reached 8.4% in May.

Daily price chart of the BTC/USD pair. Source: TradingView

Furthermore, the crash left BTC trending even more in sync with the performance of the Nasdaq Composite, of great technological weight. The US stock index fell more than 30% between November 2021 and June 2022.

There will be more rate hikes in the future

The chairman of the Fed, Jerome Powell, stated in his appearance before Congress that his rate hikes will continue to lower inflation, although he added that “the pace of these changes will continue to depend on the data that arrives and the evolution of the outlook for the economy.”

The statement came after A Reuters poll of economists agreed that the Fed would raise benchmark interest rates by another 75 basis points in July, followed by a 0.5% increase in September.

That adds more downside potential to an already declining cryptocurrency market, Informa Global Markets noted, a London-based financial intelligence firm, adding that it will not bottom out until the Fed eases its “aggressive approach to monetary policy.”

But a 180-degree turn in aggressive policies seems unlikely in the short term, given the central bank’s 2% inflation target. Curiously, the difference between the Fed funds rate and the consumer price index (CPI) is currently the largest on record.

Will Bitcoin be able to survive its first global economic crisis?
Fed funds rate versus inflation. Source: Ecoinometrics

Bitcoin Faces First Potential Recession

Almost 70% of economists believe that the US economy will enter a recession next year due to the aggressive actions of the Federal Reserveaccording to a survey of 49 respondents by the Financial Times.

recapitulating, A country enters a recession when its economy faces a negative gross domestic product (GDP), along with rising unemployment levels, declining retail sales, and lower manufacturing output for an extended period of time.

In particular, about 38% expect the recession to start in the first half of 2023, while 30% expect the same to happen in the third quarter.. Furthermore, another survey conducted by Bloomberg in May shows a 30% chance of a recession next year.

Will Bitcoin be able to survive its first global economic crisis?
The next recession in the US will start in 2023. Source: Financial Times

Powell also noted in his June 22 news conference that recession “is certainly a possibility” due to “the events of the last few months around the world,” that is, the war between Ukraine and Russia that has caused a food and oil crisis throughout the world.

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The predictions risk putting bitcoin in the face of a full-blown economic crisis. And the fact that it has not behaved as a safe-haven asset during the period of rising inflation increases the probability that it will continue to decline along with the Wall Street indices, mainly technological values.

For its part, the collapse of Terra, a $40 billion “algorithmic stablecoin” project, and which has caused insolvency problems at Three Arrow Capital, the largest cryptocurrency hedge fund, it has also destroyed demand across the cryptocurrency sector.

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

In the same way, other blue-chip digital assets, such as Cardano (ADA), Solana (SOL), and Avalanche (AVAX), are down 85-90% from their 2021 highs.

“The house of crypto is on fire, and everyone is, you know, running for the exits because trust in the space has just been lost,” said Edward Moya, a senior market analyst at OANDA, an online forex brokerage.

BTC bear markets are nothing new

Bearish predictions for bitcoin see the price breaking below its $20,000 support level, with Leigh Drogen, general partner and CIO of Starkiller Capital, a digital asset quantitative hedge fund, anticipating the coin hitting $10,000.85% less than its maximum level.

Nevertheless, there is little evidence of Bitcoin’s total crash, especially after the coin faced six bear markets (based on its corrections of more than 20%) in the past, each of which led to a rally above the high previous history.

Will Bitcoin be able to survive its first global economic crisis?
BravenewCoin Liquidity Index showing the Bitcoin bear market since 2011. Source: TradingView

Nick, an analyst at data resource Ecoinometrics, thinks bitcoin behaves like a stock index, still in the “middle of an adoption curve.”

Bitcoin is likely to continue to fall in a higher interest rate environmentsimilar to how the US benchmark S&P 500 index has fallen multiple times over the past 100 years, then recover strongly.

Extracts:

“Between 1929 and 2022 the S&P500 has risen 200 times. That’s something like a 6% annualized rate of return.” […] Some of those asymmetric bets are obvious and quite safe, like buy bitcoin now.”

Will Bitcoin be able to survive its first global economic crisis?
The falls of the S&P 500 throughout its history. Source: Ecoinometrics

Most altcoins will die

Unfortunately, the same cannot be said for all coins in the cryptocurrency market. Many so-called alternative cryptocurrencies, or “altcoins,” have plummeted this year. Some small-cap coins, in particular, have seen price drops of over 99%.

Will Bitcoin be able to survive its first global economic crisis?
The altcoins that have faced losses of almost 100% in 2022. Source: Messari

Nevertheless, projects with healthy adoption rates and real users could thrive after a possible global economic crisis.

The leading candidate to date is Ethereum, the leading smart contract platform, which dominates the blockchain ecosystem. with more than $46 billion locked in its DeFi applications.

Will Bitcoin be able to survive its first global economic crisis?
Ethereum leads the smart contract industry. Source: DeFi Calls

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

For its part, older altcoins such as Dogecoin (DOGE) also have a better chance of survival, especially with speculation surrounding the project’s possible integration with Twitter.

Usually, a macro-driven bear market will likely hurt all digital assets across the board in the coming months.

But coins with lower market capitalization, negligible liquidity and higher volatility will be at higher risk of collapse, Alexander Tkachenko, founder and CEO of VNX, a digital gold dealer, told Cointelegraph. And he added:

“If bitcoin and other cryptocurrencies want to regain their full strength, they have to become self-sustaining alternatives 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. All investments and operations involve risk, so you should do your own research when making a decision.

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