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Can bitcoin survive its first global economic crisis?

Can bitcoin survive its first global economic crisis?

Bitcoin (BTC) is a response to the global downturn in 2008. It has introduced a new way of conducting transactions without relying on the trust of third parties such as banks, especially bankrupt banks which have nevertheless left the government on bailout. at the expense of the public.

“You have to trust the central bank not to devalue the currency, but the history of fiat currencies is full of abuses on this trust,” Satoshi Nakamoto wrote in 2009.

The bitcoin genesis block contains this secret with the following embedded message:

January 3, 2009 Finance minister set to bail out banks.

But while bitcoin continues to mine unspoiled blocks and its gold – like properties have attracted investors looking for “digital gold”, the current 75% drop reflects the current $ 69,000 achieved in November. 2021 is not exempt from global economic forces.

At the same time, the cryptocurrency market lost a total of $ 2.025 billion over the same period, reflecting the large-scale destruction of demand in the industry.

The bitcoin crash erupted during the period of rising inflation and the intervention of world central banks. In particular, the Federal Reserve raised its benchmark rates by 75 basis points (bps) on June 15 to curb inflation, which reached 8.4% in May.

BTC / USD pair daily price chart. Source: Trade View

In addition, the crash left the BTC trend even more in line with the performance of Nasdaq Composite, a high – tech heavy stock index. The US stock index fell more than 30% between November 2021 and June 2022.

More rate hikes to come

Fed Chairman Jerome Powell pointed out in his testimony to Congress that rate hikes would continue to lower inflation, while at the same time saying that “the pace of these changes will continue depending on incoming data and developments.”

The statement follows a Reuters poll for economists who agree that the Fed will raise its benchmark rates by another 75 basis points in July and then raise them by 0.5% in September.

This adds to the downside of a declining cryptocurrency market, said London-based financial information firm Informa Global Markets, saying it will not succeed until the Fed eases its position.

However, reversal of intervention policies in the short term does not appear likely in the light of the central bank’s 2% inflation target. Interestingly, the spread between the Maintenance Fund Rate and the Consumer Price Index (CPI) is now at its widest on record.

Rate of raised funds compared to inflation. Source: Ecoinometrics

Bitcoin is on its way to its first potential recession

According to a Financial Times survey of 49 people, nearly 70% of economists believe the US economy will collapse next year due to a Fed intermediary.

As a reminder, a recession enters a country as its economy is hit by negative gross domestic product (GDP), which is associated with rising unemployment, falling retail sales and declining manufacturing output for an extended period.

Specifically, about 38% of respondents expect the recession to begin in the first half of 2023, while 30% expect it to occur in the third and fourth quarters. In addition, a separate survey conducted by Bloomberg in May indicates that there could be a 30% recession next year.

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

Mr Powell also said during his June 22 press conference that a recession is “definitely possible” due to “events in recent months around the world”, ie the war between Ukraine and Russia which led to the food and oil crisis. all over the world.

These predictions risk putting bitcoin ahead of a major economic crisis. And because it did not function as a safe haven asset during the period of high inflation, it is likely to continue to fall along with Wall Street indices, primarily technology stocks.

Meanwhile, worldwide demand was also destroyed by the collapse of Terra, a $ 40 billion stablecoin algorithmic project, and the insolvency issues caused by Three Arrow Capital, the largest cryptocurrency hedge fund.

For example, Ether, the second largest cryptocurrency after bitcoin, fell above 80% to the lowest level of $ 880 during the current bear cycle.

Similarly, other leading digital assets, including Cardano (ADA), Solana (SOL), and Avalanche (AVAX), have fallen 85% to over 90% from their peaks in 2021.

“The crypto house is on fire, and everyone is bursting out because there is no more confidence in this space,” said Edward Moya, chief market analyst at OANDA, a crypto brokerage firm.

BTC bear markets are not new

The upcoming bearish forecast for bitcoin imagines the price breaking below its $ 20,000 support level, Leigh Drogen, general partner and chief information officer at Starkiller Capital, a quantitative hedge fund for digital assets, predicts bitcoin $ 10,000, 85% below its full time. ard.

However, there is little evidence of a complete decline of bitcoin, especially after the confrontation of the cryptocurrency with six bear markets (based on its more than 20% corrections) in the past, all of which lead to an upward rally above the previous record.

BravenewCoin Liquid Index shows the bitcoin bear market since 2011. Source: TradingView

Nick, an analyst at data firm Ecoinometrics, sees bitcoin behaving like a stock index, still “in the middle of an adoption curve.”

Bitcoin is likely to fall more in a higher interest rate environment – similar to how the US S&P 500 benchmark has fallen several times over the last 100 years, without recovering sharply thereafter.

Quotes:

“Between 1929 and 2022, the S & P500 has grown 200 times. That’s something like a 6% annual rate of return. […] Some of these asymmetric bets are quite clear and safe, like buying bitcoin now. ”

The S&P 500 declines over its history. Source: Ecoinometrics

Most altcoins will be gone

Unfortunately, the same cannot be said for all assets in the crypto market. Many of the alternative cryptocurrencies, or altcoins, as they are called, have expired this year. Some cryptocurrencies, in particular, have experienced price reductions of over 99%.

Soaring altcoins suffered almost 100% losses in 2022. Source: Messari

However, projects with healthy adoption rates and actual users could survive a potential global economic crisis.

The main competitor to date is Ethereum, the leading smart contract platform, which is at the forefront of the layer-1 blockchain ecosystem with more than $ 46 billion locked across its DeFi functions.

Ethereum dominates the smart contract sector. Source: DeFi Llama

Other blockchains, including Binance Smart Chain (BSC), Solana, Cardano, and Avalanche, could attract users as alternatives, ensuring demand for their underlying signals.

Meanwhile, older altcoins, like Dogecoin (DOGE), have a higher chance of surviving, especially with speculation about the potential integration of Twitter into the pipes.

Overall, all digital assets are likely to be impacted by a macro – factor driven crop market in the coming months.

But cryptocurrencies with lower market capitalization, depreciating liquidity and higher volatility are at greater risk of crash, bitcoin trader Alexander Tkachenko, founder and CEO of VNX, told Cointelegraph. He added:

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

The views and opinions expressed herein are those of the author only and do not necessarily reflect the views of Cointelegraph.com. All investments and trades involve risk, you should do your own research before making a decision.

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