By Frances Yue
Investors are increasingly worried that a recession may begin in the U.S. later this year, as the Federal Reserve on Wednesday raised its key interest rate for the 10th time in a row, while growing evidence points to a slowing U.S. economy.
In search of a “safe haven”, some investors have turned to bitcoin , which has limited supply and is often touted by supporters as a hedge against existing financial system stress and monetary policy. The crypto has rallied more than 75% so far this year, according to CoinDesk data.
However, there’s not much historical data to draw on to suggest how the crypto might perform in a recession.
Born in 2009 after the 2007-2008 financial crisis, bitcoin had only been through one recession, which lasted from February 2020 to April the same year, as the outbreak of Covid-19 sent shock waves across the global economy.
During that time, bitcoin tumbled more than 60% in a month from above $10,000 in February 2020 to as low as $3,905 in March.
Nevertheless, as the Fed started easing its monetary policy in March 2020, bitcoin started its bull run along with other risk assets. The crypto reached an all-time high of $68,990 in November 2020.
Bitcoin’s performance in a recession would depends on the actions of monetary and fiscal policy makers, noted Greg Cipolaro, global head of research at NYDIG.
If the U.S. central bank responds to a recession with money printing and lowering interest rates, “those things tend to be favorable for bitcoin,” said Cipolaro in a call. “That’s something that we’ve seen over the past 18 to 24 months.”
In fact, bitcoin has already priced in some of the looming recession risks, according to Matt Hougan, chief investment officer at Bitwise Asset Management.
The crypto plunged more than 60% in 2022, and reached a cyclical low of $15,480 in November, after digital asset exchange FTX collapsed.
“When we had such a terrible pullback last year, that was partly in reaction to the Fed aggressively raising interest rates,” Hougan said in a call. “To some degree, last year’s return sort of already priced in the expectation that we were going to head into a weaker economy,” according to Hougan.
Still, “if we have an extreme negative recession [this year], and there is a massive negative wealth effect that impacts all assets. Of course, that would hurt crypto,” Hougan said.
“But if it’s a mild recession, as most people are predicting, I think crypto will basically ignore it. It’s already priced in and has the growth to overcome it,” according to Hougan.
To be sure, the crypto market remains highly volatile, while global regulators have been increasing their oversight of the industry.
Weakening dollar
The U.S. dollar, which significantly outperformed its major rival currencies last year, has been weakening this year.
The ICE U.S. Dollar Index, a gauge of the greenback’s strength against the world’s other main currencies, rose more than 8% in 2022 but dipped over 2% so far this year, according to Dow Jones market data.
Read:Big question with dollar under fire from rival countries and currencies: What happens to markets if the greenback loses its dominance?
If the U.S. dollar continues to weaken, it could benefit bitcoin, noted Peter Eberle, chief investment officer at Castle Funds. U.S. dollar and the greenback-pegged stablecoins are still among the largest trading pairs for bitcoin by volume, according to data from multiple crypto exchanges.
If a global recession hits and the Fed becomes the first among other major central banks to start cutting interest rates, “what you’ll see is dollars flowing out of the US treasuries, making the dollar weaker, making other currencies including cryptocurrencies stronger,” said Eberle.
Bitcoin halvings
Other than the macroeconomic environment, there are several other factors that might impact bitcoin’s price.
Some bitcoin supporters are basing their bullish view on the crypto for the coming months on its historical performance around the “halving” events.
Bitcoin halving, which happens every four years, reduces by half the amount of the tokens miners receive as rewards. The process aims to reduce the crypto’s supply and limit its maximum supply at 21 million. The next halving is expected to happen in April 2024.
“Historically, halvings led to significant appreciation in bitcoin both before and after the event,” said Mark Palmer, equity research analyst at Berenberg Capital Markets. “In fact, what we have seen is that about 15 months prior to the having, bitcoin tends to bottom out and then begin to rise.”
-Frances Yue
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05-07-23 2131ET
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