Bitcoin (BTC) was a response to the global recession of 2008. It introduced a new way to transact without relying on the trust of third parties such as banks, especially failing banks that were bailed out by the government anyway at the expense of the public.
“The central bank must be trusted not to downgrade the currency, but the history of fiat currencies is full of breaches of that trust,” Satoshi Nakamoto wrote in 2009.
Bitcoin’s genesis block sums up the intent with the following embedded message:
The Times 03/Jan/2009 Chancellor on the brink of second bank bailout.
But while Bitcoin remains undisturbed, and its gold-like properties have attracted investors seeking “digital gold,” the current 75% drop from $69,000 in November 2021 shows it is not immune to global economic forces.
At the same time, the entire crypto market lost $2.25 trillion over the same period, suggesting massive destruction of industry demand.
Bitcoin’s crash occurred during the period of rising inflation and the aggressive response of global central banks to it. Notably, the Federal Reserve raised its benchmark rate by 75 basis points (bps) on June 15 to curb inflation, which reached 8.4% in May.
BTC/USD daily price chart. Source: TradingView
In addition, the crash made BTC trending even more in sync with tech-heavy Nasdaq Composite’s performance. The US stock market index fell by more than 30% between November 2021 and June 2022.
More interest rate hikes on the horizon
Fed Chair Jerome Powell noted in his congressional statement that their rate hikes would continue to lower inflation, though he added that “the pace of those changes will continue to depend on incoming data and the evolving outlook for the economy.”
The statement followed a Reuters poll of economists who agreed that the Fed would raise benchmark rates by another 75 bps in July and hike 0.5% in September.
That adds more downside potential to an already declining crypto market, noted Informa Global Markets, a London-based financial intelligence firm, which said it wouldn’t bottom out until the Fed abandons its “aggressive approach to monetary policy.”
But a reversal of aggressive policies seems unlikely in the near term, given the central bank’s 2% inflation target. Interestingly, the gap between the Fed’s interest rates and the consumer price index (CPI) is now the widest on record.
Fed funds rate versus inflation. Source: Ecoinometry
Bitcoin faces first potential recession
According to a survey of 49 respondents to the Financial Times, nearly 70% of economists believe the US economy will plunge into recession next year as a result of an aggressive Fed.
In summary, a country enters a recession when its economy is confronted with negative gross domestic product (GDP), combined with rising unemployment levels, declining retail sales and lower manufacturing output over an extended period of time.
Notably, about 38% expect the recession to start in the first half of 2023, while 30% expect the same to happen during the Q3-Q4 session. In addition, a separate Bloomberg survey in May found that there is 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 “certainly a possibility” due to “events of the last few months around the world”, i.e. the war between Ukraine and Russia that sparked a food and oil crisis across the world. the whole world has caused.
The forecasts run the risk of Bitcoin facing a full-blown economic crisis. And the fact that it hasn’t acted like a safe haven during the period of rising inflation increases the likelihood that it would continue to fall alongside Wall Street indices, especially technology stocks.
Meanwhile, the collapse of Terra, a $40 billion “algorithmic stablecoin” project, and sparked insolvency problems in Three Arrow Capital, the largest crypto hedge fund, has also destroyed demand in the crypto sector.
For example, Ether, the second-largest cryptocurrency after Bitcoin, fell more than 80% to $880 lows during the ongoing bear cycle.
Similarly, other top-rated digital assets, including Cardano (ADA), Solana (SOL), and Avalanche (AVAX), plunged in the 85% to over 90% range from their 2021 peaks.
“The crypto house is on fire and everyone is just rushing for the exits because confidence in the space is just completely lost,” said Edward Moya, senior market analyst at OANDA, an online forex brokerage.
BTC bear markets are nothing new
Incoming bearish forecasts for Bitcoin forecast the price to move below the $20,000 support level, with Leigh Drogen, general partner and CIO at Starkiller Capital, a quantitative digital asset hedge fund, expecting the coin to hit $10,000, down from 85. % from its peak level.
However, there is little evidence of Bitcoin’s total demise, especially after the coin’s confrontation with six bear markets (based on the 20%-plus corrections) in the past, each of which led to a rally above the previous record.
BravenewCoin Liquid Index showing Bitcoin’s bear market since 2011. Source: TradingView
Nick, an analyst at data source Ecoinometrics, sees Bitcoin behaving like a stock index, still in the “middle of an adoption curve.”
Bitcoin is likely to fall further in an environment of higher interest rates, similar to how the US benchmark S&P 500 has fallen several times over the past 100 years, only to recover strongly.
“Between 1929 and 2022, the S&P 500 has risen 200x. That’s like an annual return of 6% […] Some of those asymmetric bets are clear and pretty safe, like buying Bitcoin now.”
S&P 500 withdrawals throughout history. Source: Ecoinometry
Most altcoins will die
Unfortunately, the same cannot be said for all coins in the crypto market. Many of these so-called alternative cryptocurrencies, or “altcoins”, have fallen to their deaths this year. Particularly with some low-cap coins, more than 99% price drops are logging.
Altcoins that lost nearly 100% in 2022 faced losses of nearly 100%. Source: Messari
Nevertheless, projects with healthy adoption rates and real users can come out on top in the wake of a potential global economic crisis.
The top contender so far is Ethereum, the leading smart contract platform, which dominates the layer one blockchain ecosystem with more than $46 billion locked in its DeFi applications.
Ethereum is leading the smart contract industry. Source: DeFi Llama
Other chains, including Binance Smart Chain (BSC), Solana, Cardano, and Avalanche, may also attract users as an alternative, ensuring demand for their underlying tokens.
Meanwhile, older altcoins like Dogecoin (DOGE), also have higher chances of survival, especially with speculation about possible Twitter integration in the pipeline.
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, disdainful liquidity and higher volatility are at greater risk of collapsing, Alexander Tkachenko, founder and CEO at VNX, a digital gold trader, told Cointelegraph. He added:
“If Bitcoin and other cryptocurrencies are to return to full power, they must become self-sustaining alternatives to fiat currencies, especially 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. Every investment and trading move involves risks, you should do your own research when making a decision.