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

Bitcoin (BTC) was a response to the 2008 global recession. It introduced a new way of transacting without having to rely on trusted third parties like banks, especially failed banks. which, however, were bailed out by the government at public expense.

“One must trust the central bank not to debase the currency, but the history of fiat currencies is littered with breaches 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

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

But even though Bitcoin continues to mine blocks without flinching, and its gold-like properties have attracted investors looking for “digital gold”, its current 75% decline from its November 2021 highs of $69,000 shows that it is not immune to global economic forces.

Simultaneously, The entire cryptocurrency market lost $2.25 trillion over the same period, indicating massive demand destruction in this sector.

The Bitcoin crash occurred during a time of rising inflation and global central banks’ response to it. Notably, the Federal Reserve hiked interest rates by 75 basis points (bps) on June 15 to stem inflation, which hit 8.4% in May.

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

Additionally, the crash caused BTC to trend even more in line with the Nasdaq Composite’s performance, of great technological importance. The US stock index fell by more than 30% between November 2021 and June 2022.

There will be more rate hikes in the future

The Fed Chairman Jerome Powell, speaking before Congress, indicated that his rate hikes will continue to lower inflation, although he added that “the pace of these changes will remain dependent on the data coming in and the evolving economic outlook.”

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

That adds more downside to an already declining cryptocurrency market, noted Informa Global Markets, a London-based financial services firm, adding that it won’t 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 inflation target of 2%. Oddly enough The spread between the Fed’s interest rate and the consumer price index (CPI) is currently the widest on record.

Fed funds rate versus inflation. Source: Econometrics

Bitcoin faces its first potential recession

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

recapitulating, A country enters a recession when its economy faces a prolonged period of negative gross domestic product (GDP) along with rising unemployment, falling retail sales and lower manufacturing output.

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

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

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

The predictions risk exposing Bitcoin to a full-blown economic crisis. And the fact that it hasn’t behaved like a safe haven during the period of rising inflation increases the likelihood that it will continue to fall along with Wall Street indices, mainly technological values.

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

For example, Ether, the second largest cryptocurrency after Bitcoin, has fallen more than 80% to as low as $880 during the ongoing bear cycle.

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

“The house of crypto is on fire and everyone is running for the exits because trust in space has just been lost,” said Edward Moya. Senior Market Analyst at OANDA, an online forex broker.

BTC bear markets are nothing new

Bearish predictions for Bitcoin see the price falling below the $20,000 support level, and Leigh Drugs, general partner and CIO of Starkiller Capital, a quantitative digital asset hedge fund, expects the coin to reach $10,00085% less than its peak.

Nevertheless, There is little evidence of Bitcoin’s all-out crash, especially after the coin has experienced six bear markets in the past (based on its 20+% corrections), each of which resulted in a rally above the previous all-time high.

BravenewCoin Liquidity Index shows the Bitcoin bear market since 2011. Source: TradingView

Nick, an analyst at data source Ecoinometrics, believes Bitcoin is behaving like a stock index that’s still “in the middle of an adoption curve.”

Bitcoin is likely to fall further in a higher interest rate environmentsimilar to how the US benchmark SP 500 has fallen several times in the last 100 years, then recover strongly.

Excerpts:

“Between 1929 and 2022, the SP500 is up 200x. That equates to roughly a 6% annual return.” […] Some of these asymmetric bets are obvious and pretty safe, like buy bitcoin now.”

The falls of the SP 500 throughout its history. Source: Econometrics

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 collapsed this year. Some small-cap coins in particular have seen price declines of over 99%.

The altcoins that suffered 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 top contender so far is Ethereum, the leading smart contract platform dominating the blockchain ecosystem. with more than $46 billion in its DeFi applications.

Ethereum is a leader in 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 the underlying tokens.

For his part also older Altcoins like Dogecoin (DOGE). They have a better chance of surviving, especially given the speculation about a possible integration of the project with Twitter.

Usually, A macro-driven bear market is likely to hit all digital assets across the board in the coming months.

However, coins with smaller market caps, negligible liquidity and higher volatility are at higher risk of collapse exposed. Alexander Tkachenko, founder and CEO of VNX, a digital gold trader, told Cointelegraph. And he added:

“If bitcoin and other cryptocurrencies are to regain their full strength, they must become self-sustaining alternatives to fiat currencies, particularly the US dollar.”

The views and opinions expressed herein 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 your decision.

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