What will happen to bitcoin in a recession?

Bitcoin was launched in 2009 in response to the Great Financial Crisis and the global recession of 2008. It was initially designed as a decentralized, non-bank-based payment system that required government bailouts at the expense of US taxpayers.

As a result, bitcoin hasn’t really faced the full recessionary test. The National Bureau of Economic Research, tasked with determining whether a recession is official, ruled last year that a recession will occur in 2020 with the onset of the pandemic.

Bitcoin’s first ‘stagnation’

According to NBER, the COVID-19 recession began in February 2020 and lasted through April. The recession was marked by a slight decline of 31.4% in GDP during the second quarter. However, it also saw a significant recovery in the third quarter due to the unprecedented monetary stimulus, which boosted production by 33.4%.

Two months later, the pandemic-era recession was the shortest in US history. The price of Bitcoin fell in early 2020, but the recession ended so quickly that the cryptocurrency did not see any profound impact. As a result, we have no idea how Bitcoin will respond to a typical recession, especially a prolonged one, as some market watchers are now predicting.

A growing number of market analysts are addressing widespread fears about a recession. For example, Citi analysts estimate the probability of a global recession at 50% in the near future, while Goldman Sachs analysts said stocks are already expanding in a “mild” recession.

The Financial Times polled 49 economists recently and found that 70% of them expect a recession in the US next year due to the hawkish policies of the Federal Reserve. Even Fed Chairman Jerome Powell himself recently warned that engineering a soft landing would be difficult, adding that their aggressive attempts to rein in inflation could lead to a recession.

stagnation definition

From a traditional and technical point of view, a recession occurs when an economy’s GDP slides into negative while unemployment rises, retail sales fall, and industrial production falls. In general, this economic decline should continue for at least two consecutive quarters.

That’s why some might argue that the 2020 recession didn’t qualify as one, even though its February-April schedule spanned parts of two quarters. Since Bitcoin has only been around since 2009, it lacks a history that will enable us to predict what it will do during a recession.

Recessions usually lead investors to look for safe haven assets such as gold or the dollar. At the moment, gold is holding up well but not rallying too much, and the dollar is still relatively strong, which is probably why gold hasn’t made a rally yet.

What to buy during a recession

Recessions are generally not a good time to buy stocks, but some perform better than others. Sectors such as the energy, utilities, financial and industrial sectors, and consumer goods tend to do better than sectors such as consumer discretion and technology.

However, investors should keep in mind that a bear market is really the best time to buy stocks that will stand the test of time because prices are low. The trade-off is that the money will be locked out for a long time because these stocks probably won’t rise until the bear market is over and the recovery begins.

So what does all this mean for bitcoin? It has been clear for years that Bitcoin is a highly speculative asset. Recently, the cryptocurrency has shown a strong and positive correlation with stocks, especially tech stocks.

This trend suggests that Bitcoin may not be as recession-proof as crypto enthusiasts have long predicted. Instead of “digital gold,” bitcoin behaves like a tech stock. In fact, Bitcoin’s plunge proves that it lacks the safe haven status granted to physical gold.

Bitcoin Price Prediction

Of course, every cryptocurrency fan wants to know when bitcoin will expire. After all, every investor dreams of buying at the bottom of the market, but history shows that it is impossible to successfully time the market, no matter what market you are talking about. However, that won’t stop people from trying.

Cointelegraph has collected commentary from multiple sources indicating that a Bitcoin bottom is near or has passed recently. For example, the site drew attention to a tweet from David Puell of ARK Invest at Cathie Wood. He pointed to some numbers that indicate that the Bitcoin market may not be as bearish as is widely believed.

Bill looked at the cost basis for both long- and short-term holders and found that those who held bitcoin for longer paid less overall for their coins than those who bought their coins more recently. As a result, the short-term owners are feeling the pain of bitcoin’s fall more than the long-term owners.

Has Bitcoin Reached the Bottom?

Of course, even without the math, his statement is clear because anyone who bought bitcoin at the end of last year or early this year has lost a large part of the change in their trading. Hopefully, they’re excited (holding on to their dear life) tightly in the hope that the cryptocurrency will reach the price they paid for again.

In any case, well-known analyst Root responded to Boyle’s tweet by saying that he sees “a high probability that we either have or are very close to the bottom.” Cointelegraph also drew attention to the popular scale on the series called Mayer Multiple.

The indicator shows how far the bitcoin price has fallen below the 200-day moving average. On June 22nd, it displayed a reading of 50% below the 200-day moving average, a level it has been at only 2% of the cryptocurrency’s life.

Crypto entrepreneur Kyle Chase notes that macroeconomic conditions are different this time, but he thinks it would be a good idea to keep an eye on the index.

Wise thinking?

Chase’s point about the overall conditions is critical. These are unprecedented times, and bitcoin is still a relatively new asset class. The fact that Bitcoin has been affected by non-crypto macro factors suggests that it has finally matured and that institutional investors are becoming comfortable with it.

OANDA’s Edward Moya said in an email on Wednesday that the merger may be around the corner for bitcoin as he believes the challenging macro environment was close to being fully priced. However, on Thursday, the story was a little different.

“Bitcoin’s long-term outlook is much higher, but no one is confident that the bottom is in place,” Moya concluded. “Bitcoin will remain a volatile trade, and the correlation with stocks looks set to continue for a long time.”

He also noted that Bitcoin was holding around $20,000 as Wall Street tried to see how aggressive the Federal Reserve was in fighting inflation. However, he added that bitcoin remains a risky asset and does not expect to trade on crypto-related fundamentals until US stocks hit a “stable bottom.”

In short, the “experts” really don’t know and can’t tell where Bitcoin’s bottom will be. As with any investment you expect to recover, it may be wise to hold until it goes up. After all, bear markets usually offer the lowest prices for assets, but the key is to choose the assets that will return when the market respects itself.

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