Can Bitcoin survive its first global economic crisis?

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

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

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

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.

But while Bitcoin keeps block mining undeterred, and its gold-like properties have attracted investors seeking “digital gold,” its current 75% drop from highs of $69,000 in November 2021 shows that it is not immune to threats. global economic forces.

Simultaneously, the entire crypto market lost $2.25 trillion in the same period, suggesting large-scale demand destruction in the industry.

Bitcoin’s decline appeared during the period of rising inflation and the aggressive response of global central banks. In particular, the Federal Reserve raised its benchmark rates by 75 basis points (bps) on June 15 to curb inflation that reached 8.4% in May.

BTC/USD daily price chart. Source: TradingView

Additionally, the drop left BTC trending even more in sync with the performance of the tech-heavy Nasdaq Composite. The US stock index fell more than 30% between November 2021 and June 2022.

More rate hikes ahead

Fed Chairman Jerome Powell noted in his testimony to Congress that his rate hikes would continue to reduce inflationalthough he added that “the pace of those changes will continue to depend on incoming data and the evolution of the outlook for the economy.”

The declaration Following Reuters poll of economists, who agreed the Fed would raise benchmark rates by a further 75 bps in July and follow it up with a 0.5% hike in September.

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

But a U-turn on aggressive policies seems unlikely in the short term, given the central bank’s 2% inflation target. Interestingly, the gap between the Fed funds rates and the consumer price index (CPI) is now the largest on record.

Federal funds rate versus inflation. Source: Echoinometry

Bitcoin Faces First Potential Recession

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

In short, 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.

In particular, around 38% expect the recession to start in the first half of 2023, while 30% expect the same to happen during the third and fourth quarter session. In addition, a separate survey done by Bloomberg in May shows a 30% chance of a recession next year.

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

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

The predictions risk putting Bitcoin before a full-blown economic crisis. And the fact that he has not behaved at all as a secure asset during the period of rising inflation increases the probability that it will continue to fall along with the Wall Street indices, mainly technology stocks.

Meanwhile, the earth collapse (LUNA, since renamed LUNC), a $40 billion “algorithmic stablecoin” project, which led to insolvency problems at Three Arrow Capitalthe largest cryptocurrency hedge fund, has also destroyed demand across the cryptocurrency sector.

For example, ether (ETH), the second largest cryptocurrency after Bitcoin, fell more than 80% to lows of $880 during the ongoing bear cycle.

Similarly, other top-tier digital assets, including Cardano (ADA), solana (SUN) and Avalanche (AVAX), sank in the range of 85% to more than 90% from its 2021 peaks.

“The crypto house is on fire, and everyone is, you know, running for the exits because trust in the space has just been completely lost.” said Edward Moya, Senior Markets Analyst at OANDA, an online forex brokerage firm.

BTC bear markets are nothing new

Incoming Bearish Predictions for Bitcoin envisions 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 that the coin will reach $10,000, 85% less than its maximum level.

However, there is little evidence of Bitcoin’s complete demise, especially after the coin’s confrontation with six bear markets (based on its corrections of more than 20%) in the past, each leading to a rebounds above previous all-time high.

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

Nick, Ecoinometrics Data Resource Analyst, go Bitcoin behaves like a stock index, still in the “middle of an adoption curve”.

Bitcoin is likely to fall further in a higher interest rate environment, similar to how the US benchmark S&P 500 has fallen multiple times over the last 100 years, only to rebound strongly.

Extracts:

“Between 1929 and 2022, the S&P500 went up 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.”

Withdrawals from the S&P 500 throughout its history. Source: Echoinometry

Most altcoins will die

Unfortunately, the same cannot be said for all coins in the cryptocurrency market. Many of these so-called alternative cryptocurrencies, or “altcoins,” have died this year, with some small-cap coins, in particular, posting price drops of more than 99%.

The altcoins that have suffered losses of almost 100% in 2022. Source: Messari

However, projects with healthy adoption rates and real users could emerge victorious in the wake of a possible global economic crisis.

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

Ethereum leads the smart contract industry. Source: DeFi Calls

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

Meanwhile, older altcoins like Dogecoin (DOGE) also have higher chances of survival, particularly with speculation about possible Twitter integration in project.

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

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

“If Bitcoin and other cryptocurrencies want to regain their full power, they must 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. Every investment and trading move involves risk, you should do your own research when making a decision.