Investors fear a recession could start in the US later this year as the Federal Reserve hiked key interest rates for the 10th straight time on Wednesday while evidence of a slowing US economy is mounting. I’m getting more and more worried.
Seeking a ‘safe haven’, some investors turned to Bitcoin
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It has a limited supply and is often touted by proponents as a hedge against stress in the existing financial system and monetary policy. According to CoinDesk data, cryptocurrencies have gained more than 75% so far this year.
However, there is not much historical data available to suggest how cryptocurrencies will perform in a recession.
Bitcoin, which was born in 2009 after the financial crisis of 2007-2008, experienced only one recession lasting from February to April 2020, before the Covid-19 outbreak hit the global economy. It gave a shock to the whole.
Meanwhile, Bitcoin has fallen more than 60% in one month, from above $10,000 in February 2020 to $3,905 in March.
Nevertheless, Bitcoin started a bull market along with other risky assets as the Fed began easing monetary policy in March 2020. The cryptocurrency hit an all-time high of $68,990 in November 2020 reached.
Bitcoin’s performance in a recession will depend on the actions of monetary and fiscal policymakers, said Greg Cipollaro, head of global research at NYDIG.
In a phone call, Cipollaro said that when the U.S. central bank responds to a recession by printing money and cutting interest rates, “it tends to favor bitcoin.” “This is what we’ve seen in the last 18 to 24 months.”
In fact, according to Bitwise Asset Management chief investment officer Matt Hogan, bitcoin has already priced in some of the risks of a looming recession.
The cryptocurrency plunged more than 60% in 2022, hitting a cyclical low of $15,480 in November after the digital asset exchange FTX collapsed.
“Last year, part of the pullback that was so bad was the reaction to aggressive Fed rate hikes,” Mr. Hogan said in a phone call. “Last year’s returns partly priced in the expectation that the economy would weaken,” Hogan said.
Even so, “If there is an extremely negative recession, [this year], and there is a large negative wealth effect that affects all assets. Of course, that would hurt crypto,” Hogan said.
“But if it were a mild recession, as most people are predicting, I think cryptocurrencies would basically ignore it. Hougan said.
Indeed, while global regulators are stepping up their scrutiny of the industry, the cryptocurrency market remains highly volatile.
weak dollar
After significantly outperforming its major rivals last year, the US dollar has fallen this year.
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The dollar, a measure of the US dollar’s strength against other major global currencies, rose more than 8% in 2022, but has fallen more than 2% so far this year, according to market data from Dow Jones.
read: The big question with the dollar under attack from rival countries and currencies: what will happen to the market if the dollar loses its dominance?
Peter Eberle, chief investment officer at Castle Funds, said a continued weakness in the dollar could benefit bitcoin. US dollars and US dollar-pegged stablecoins remain one of Bitcoin’s largest trading pairs, according to data from multiple cryptocurrency exchanges.
If a global recession hits and the Fed is the first among other major central banks to start cutting rates, “the dollar will drain out of U.S. Treasuries, the dollar will weaken, and other currencies, including cryptocurrencies, will strengthen.” said Hébert.
Bitcoin half-life
Besides the macroeconomic environment, there are several other factors that affect the price of Bitcoin.
Some Bitcoin proponents are bullish on the cryptocurrency in the coming months based on its past performance around the “halving” event.
Bitcoin Halving, which takes place every four years, halves the amount of tokens miners receive as rewards. The process aims to reduce the supply of cryptocurrencies and limit the maximum supply to his 21 million. The next half-life he is scheduled for April 2024.
“Historically, halvings have resulted in significant Bitcoin rally before and after the event,” said Mark Palmer, equity research analyst at Berenberg Capital Markets. About 15 months before , Bitcoin tends to bottom out and then start rising.”
