Bitcoin (BTC) was the answer to the 2008 global recession. He introduced a new way of transacting transactions that did not depend on the trust of third parties such as banks, especially bankrupt banks that were nevertheless bailed out by the government at the expense of the public.

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“A central bank needs to be trusted not to devalue a currency, but the history of fiat currencies is full of breaches of that trust.” – Satoshi Nakamoto wrote in 2009.

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The Bitcoin genesis block summarizes the intent with the following inline message:

The Times, 03 January 2009 Chancellor on the verge of second bank bailout.

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But while Bitcoin is not worried about block mining and its gold-like properties are attracting investors looking for “digital gold,” its current 75% drop from its November 2021 high of $69,000 demonstrates that it is not immune to global economic forces.

At the same time, the entire crypto market lost $2.25 trillion over the same period, which hints at a massive destruction of demand in the industry.

The collapse of bitcoin occurred during a period of rising inflation and a hawkish reaction to it from the world’s central banks. Notably, on June 15, the Federal Reserve raised its benchmark rates by 75 basis points (bp) to curb inflation, which reached 8.4% in May.

Daily BTC/USD price chart. Source: Trading View

In addition, the crash caused the BTC trend to become even more in sync with the performance of the high-tech Nasdaq Composite. The US stock market index fell over 30% between November 2021 and June 2022.

New rate hikes ahead

Fed Chairman Jerome Powell, in his speech to Congress, noted that their rate hikes will continue to drive down inflation, although he added that “the pace of these changes will continue to depend on incoming data and the changing outlook for the economy.”

The statement followed Reuters survey of economists. it decided that the Fed would raise benchmark rates by another 75 basis points in July and then raise them by 0.5% in September.

This adds even more negative potential to an already declining cryptocurrency market. noted Informa Global Markets, a London-based financial intelligence firm, said it will not bottom until the Fed abandons its “aggressive approach to monetary policy.”

But a hawkish reversal seems unlikely anytime soon, given the central bank’s 2% inflation target. Interestingly, the gap between Fed interest rates and the consumer price index (CPI) is now the largest on record.

Fed funds rate against inflation. Source: Econometrics.

Bitcoin Faces First Potential Recession

Almost 70% of economists believe that the US economy will slide into recession next year due to the hawkish policy of the Fed. interview out of 49 respondents conducted by the Financial Times.

As a reminder, a country enters a recession when its economy faces a negative gross domestic product (GDP) coupled with rising unemployment, lower retail sales, and lower manufacturing for an extended period of time.

Notably, about 38% expect the recession to start in the first half of 2023, and 30% expect the same to happen during the Q3-Q4 session. Moreover, a separate interview a Bloomberg survey in May shows a 30 percent chance of a recession next year.

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

Powell also noted at his press conference on June 22 that a recession is “certainly possible” due to “the events of the last few months around the world,” i.e. the war between Ukraine and Russia, which has caused food and oil crises around the world.

Predictions risk putting Bitcoin in front of a full-blown economic crisis. And the fact that it has not acted as a safe-haven asset during a period of rising inflation increases the likelihood that it will continue to decline along with Wall Street indices, primarily technology stocks.

Meanwhile, the collapse of Terra, a $40 billion “algorithmic stablecoin” project, and this led to the insolvency problems of Three Arrow Capital, the largest crypto hedge fund, also wiped out demand in the crypto sector.

For example, Ethereum, the second largest cryptocurrency after Bitcoin, fell over 80% to a low of $880 during the ongoing bear cycle.

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

“The crypto house is on fire and everyone is just, you know, rushing to the exits because they just completely lost confidence in the space,” said Edward Moya, Senior Market Analyst at online brokerage OANDA.

BTC Bear Markets Are Nothing New

The incoming bearish forecasts for Bitcoin suggest the price will fall below the $20,000 support level, with Lee Drogen, general partner and CIO of Starkiller Capital, a digital asset quantitative hedge fund, expectation that the coin will reach $10,000, which is 85% below its peak level.

However, there is little evidence of the complete demise of Bitcoin, especially after the coin has faced six bear markets (based on its corrections of over 20%) in the past, each of which led to a rally above the previous all-time high.

The BravenewCoin liquidity index showing the Bitcoin bear market since 2011. Source: Trading View

Nick, Ecoinometrics Data Resource Analyst, sees Bitcoin behaves like a stock market index, still in the “middle of the adoption curve”.

Bitcoin is likely to fall even more in a higher interest rate environment — similar to how the US benchmark S&P 500 fell several times over the past 100 years, only to recover strongly.

Excerpts:

“Between 1929 and 2022, the S&P 500 rose 200 times. That’s something like a 6% annual rate of return. […] Some of these asymmetric rates are obvious and pretty safe, like buying bitcoin now.”

S&P 500 drawdowns throughout its history. Source: Econometrics.

Most altcoins will die

Unfortunately, this cannot be said about all coins on the crypto market. Many of these so-called alternative cryptocurrencies, or “altcoins,” have gone bankrupt this year. In particular, for some coins with a small capitalization, the price drop exceeds 99%.

Altcoins that have skyrocketed have faced nearly 100% losses in 2022. Source: Messari

However, projects with healthy adoption rates and real users could come out on top after a potential global economic crisis.

As of today, the best candidate is Ethereum, the leading smart contract platform that dominates the first layer blockchain ecosystem with over $46 billion blocked in their DeFi applications.

Ethereum leads the smart contract sector. Source: DeFi Lama

Other networks, including Binance Smart Chain (BSC), Solana, Cardano, and Avalanche, can also attract users as an alternative, generating demand for their underlying tokens.

Meanwhile, older altcoins like Dogecoin (DOGE) also stand a better chance of surviving, especially given the speculation that Twitter might be integrated into the project.

Overall, a bear market focused on macro factors is likely to hurt all digital assets across the board in the coming months.

But coins with lower market caps, negligent liquidity and higher volatility will be at higher risk of collapse, Alexander Tkachenko, founder and CEO of VNX, a digital gold dealer, told Cryptooshala. He added:

“If bitcoin and other cryptocurrencies are to return to their full strength, they must become self-sufficient alternatives to fiat currencies, especially the US dollar.”

The views and opinions expressed here are solely those of the author and do not necessarily reflect those of Cryptooshala.com. Every investment and trading step involves risk, you should do your own research when making a decision.