Recession fears investors’ search for safe havens. Is bitcoin a good choice?

by James · May 7, 2023

By Frances Yue

Investors are increasingly concerned that a recession could begin in the United States later this year, as the Federal Reserve on Wednesday raised its key interest rate for the 10th time in a row amid growing evidence of a slowing US economy.

Looking for a “safe haven”, some investors have turned to bitcoin, which has limited supply and is often touted by supporters as a hedge against existing stress and monetary policy. The crypto has rallied more than 75% so far this year, according to CoinDesk data.

However, there isn’t much historical data to draw on to suggest how the crypto might perform in a recession.

Born in 2009 after the financial crisis of 2007-2008, bitcoin had only been through one recession, which lasted from February 2020 to April of the same year, when the outbreak of Covid-19 sent shockwaves through the global economy.

During that time, bitcoin fell more than 60% in one month from over $10,000 in February 2020 to as low as $3,905 in March.

Nevertheless, when the Fed started to ease its monetary policy in March 2020, bitcoin started its bullrun along with other risk assets. The crypto reached an all-time high of $68,990 in November 2020.

Bitcoin’s performance in a recession will depend on the actions of monetary and fiscal policymakers, noted Greg Cipolaro, global head of research at NYDIG.

If the U.S. central bank responds to a recession with money printing and interest rate cuts, “those things tend to be favorable for bitcoin,” Cipolaro said in a call. “That’s something we’ve seen over the last 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, hitting a cyclical low of $15,480 in November, after digital asset exchange FTX collapsed.

“When we had such a terrible downturn last year, it was partly a reaction to the Fed aggressively raising interest rates,” Hougan said in a call. “To some extent, last year’s returns were kind of already priced in anticipation of us going 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 affects all assets. Of course it would hurt crypto,” Hougan said.

“But if it’s a mild recession, as most 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 increased oversight of the industry.

Weakening dollar

The US dollar, which significantly outperformed its main rival currencies last year, has weakened this year.

The ICE US Dollar Index, a measure of the dollar’s strength against the world’s other major currencies, is up more than 8% in 2022 but has fallen more than 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 dollar loses its dominance?

If the US dollar continues to weaken, it could benefit bitcoin, noted Peter Eberle, chief investment officer at Castle Funds. The US dollar and greenback-pegged stablecoins remain among the largest trading pairs for bitcoin by volume, according to data from several crypto exchanges.

If a global recession occurs and the Fed becomes the first among other major central banks to start cutting interest rates, “what you will see is dollars flowing out of US Treasuries, making the dollar weaker, and making other currencies, including cryptocurrencies stronger. ” Eberle said.

Bitcoin halvings

Other than the macroeconomic environment, there are several other factors that can affect bitcoin’s price.

Some bitcoin followers 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 tokens that miners receive as a reward. The process aims to reduce the crypto’s supply and limit its maximum supply to 21 million. The next halving is expected to take place in April 2024.

“Historically, halvings led to significant appreciation in bitcoin both before and after the event,” said Mark Palmer, equity analyst at Berenberg Capital Markets. “In fact, what we’ve seen is that about 15 months before we got, bitcoin tends to bottom out and then start to rise.”

– Frances Yue

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05-07-23 2131 ET