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Interest Rate Concerns: Recession Coming? Economic recession is likely to have these consequences for Bitcoin | news

• Cryptocurrency market in bearish trend
• The Fed faces a challenge
• Bitcoin as a crisis investment

Recession on the way?

Although inflation in the US eased slightly in April, falling for the first time in eight months, the pressure on prices is still high. Also in the euro zone there have been significant price increases recently. Market observers therefore fear that the US Federal Reserve is using an aggressive strategy to cope with high inflation by raising interest rates. However, when rising inflation rates go hand in hand with economic stagnation, for example in connection with a high unemployment rate, stagflation occurs. The mixed word describes the combination of stagnation and inflation. If economic development does not stop but decreases, we speak of a recession. Several strategists now consider this scenario likely, including Deutsche Bank experts.

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The collapse of Bitcoin prices is the fault of the Fed

But what would a recession mean for the cryptocurrency market? James Butterfill, chief strategist at digital asset manager CoinShares, addressed this question. The prices of Bitcoin, Ether & Co. have recently come under severe pressure, which Butterfill said had several reasons. However, the analyst sees the US monetary authorities themselves as the main culprits, as he explains in a blog post. “In general, the drop in prices over the past 6 months can be explained as a direct result of the Fed’s increasingly aggressive rhetoric.” The price of veteran Bitcoin has recently reacted particularly sensitively to interest rate hikes and speculation about them.

Terra crash has a lasting effect

Furthermore, the crash of the Terra UST algorithmic stablecoin has increased the pressure on cryptocurrencies. Although the rate of the digital currency was tied to the US dollar, volatility in the UST Earth had to be prevented by linking to the cryptocurrency LUNA, created specifically for this purpose, rather than through physical financial reserves. When value is created in UST, the same amount is destroyed in LUNA and vice versa. After Terra UST lost value in May due to the downward flow of the cryptocurrency market, numerous new LUNA tokens were created in a very short time, which in turn led to the dilution of their value. After the Terra blockchain was taken offline due to the crash, the developers began a second attempt with Terra 2.0, which has not yet been successful. However, the debacle led to great uncertainty in the cryptocurrency market, as Butterfill also points out. However, the strategist describes what is happening as “unsystemic for the entire cryptocurrency space” as Terra UST accounted for less than two percent of all stablecoins.

Bitcoin has also developed an inverse correlation with the US dollar. “This makes sense as it is an emerging store of value, but it also makes it incredibly sensitive to interest rates,” the expert said. Meanwhile, however, interest rate expectations have already been discounted into the current Bitcoin price. The biggest challenge for Bitcoin investors is therefore to find out how sustainable the strength of the US dollar is.

Bitcoin and gold prices move apart: correlation with rising stocks

Bitcoin’s price has now also decoupled significantly from the gold price, as Butterfill further explains. On the other hand, the largest market cap weighted cryptocurrency now has a correlation with stocks. You can see connections, especially with respect to growth stocks, which react more sensitively to increases in interest rates. “In a way, this is a fair interpretation of the market, as unprofitable assets will experience a rise in interest rates,” adds the cryptocurrency expert. However, Bitcoin is not to be equated with a growing stock, because it is equally considered an “emerging store of value”, which is also reflected in the fact that its overall supply is predictable and limited. Therefore, the CoinShares analyst predicts that the correlation between growing stocks and Bitcoin will decline over time.

Acts on a tightrope for the Fed

The Fed is currently facing the challenge of both reducing high inflation and not putting a strain on the economy – that is, maintaining moderate economic growth. According to Butterfill, however, this is likely to be difficult because some factors influencing the success of this venture are beyond the control of monetary authorities: these include the war in Ukraine, associated oil price increases, and chain problems. of supply caused by the crown lockdown in Shanghai. According to the expert, inflation may be contained, but history shows that the price will be a recession. A sharp rise in oil prices has almost always led to a recession since the 1970s. The Market Watcher cites the Yom Kippur War in 1973, the Iranian Revolution from 1978 to 1979, the Iraq War in 1990 and the September 11 2001 terrorist attacks as examples of this.

Bitcoin suitable for times of economic recession

As a result, Butterfill expects the US Federal Reserve to continue raising interest rates over the summer while issuing weaker economic outlooks. As a result, the US dollar is likely to fall. Although the price of Bitcoin has been significantly weaker in recent months, according to the strategist, the downward trend is expected to end soon. The cryptocurrency is expected to get out of focus as the Fed is acting cautiously, while benefiting from the weakness of the US dollar and moving north. This means that the Internet currency should also detach itself from the price movements in rising stocks. Previously high valuations are likely to be fatal to stocks and show “underperformance” in the context of stagflation or even recession.

Butterfill points out that it is not possible to say exactly what economic development will be like in the coming months, but it is certain that there will be a downturn. Regardless of whether a stagflation or a recession occurs, Bitcoin can prove to be an investment in times of crisis. “With the liquidity trap really gripping central bankers, we believe Bitcoin is a good insurance policy in the face of this monetary chaos.”

Financeen.net editorial staff

Image sources: Hi, my name is Jacco / shutterstock.com, Immersion Imagery / Shutterstock.com

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