With Bitcoin’s fall, Is the worldwide recession growing?
No avoiding the truth this week: There is ugly outside. The S&P 500 is clearly in a bear market, having had its worst week since March 2020; Bitcoin dropped as low as $17,567 on Saturday (before recovering to $20,000 to start the week); the global market cap of cryptocurrencies has fallen below $1 trillion for the first time since January 2021, and liquidity problems are being experienced by big crypto firms.
All of this is made more harmful by the U.S. Federal Reserve’s increasingly extreme measures, which could trigger a recession, to combat the nation’s worst inflation jump in 41 years.
As we stated, it’s ugly at the moment. But this week’s news isn’t all awful. So let’s break it all out.
- The first time Bitcoin has ever fallen below the last bull run’s peak, and it plunged below its 2017 peak of $19,783. Even if this price reversal is exceptional, the decrease is not as severe as the 85 percent drop BTC experienced in the year following its peak in 2017. (or the 99 percent nosedive BTC survived in 2011). However, according to recent reports, more than 50% of Bitcoin owners are already in the red, and even seasoned HODLers now have realistic expectations about the coming crypto winter. This past weekend, a popular exchange executive said, “We are on the path to maximum agony.”
- The stock and cryptocurrency markets are under pressure from inflation and the Fed’s efforts to combat it. The Federal Reserve responded to May’s historic 8.6% year-over-year increase in consumer prices by raising interest rates by an “unusually substantial” 0.75 percent last Wednesday, igniting concerns that the Fed’s attempts to fight inflation might push the United States into a recession. The rate cuts and stimulus from the epidemic era, which had previously bolstered riskier assets like tech stocks and cryptocurrencies with extra consumer cash, were reversed faster than anticipated. Following the announcement, the prices of BTC and ETH fell by as much as 16 and 20 percent, respectively, before recovering to start the week.
- Several digital asset companies have experienced liquidity problems due to the crypto collapse. Last week, a crypto bank which oversees $11 billion in assets for 1.7 million members, said that it was stopping all withdrawals due to “extreme market conditions,” which raised concerns about the origin of its notably high 18 percent yield on crypto deposits. On Friday, Hong Kong-based cryptocurrency lender took similar action on Friday, which stopped operations due to “exceptional liquidity challenges.” Three Arrows Capital, a cryptocurrency hedge fund, is reportedly in danger of going bankrupt after failing to meet lenders’ capital requirements.
- What about those bright spots, sheesh? Despite the dip, according to a Bank of America study from this month, 91 percent of respondents want to purchase cryptocurrency in the next six months. A Deloitte survey also found that 85% of American retail executives believe digital currency payments will become “ubiquitous” over the next five years. BTC’s mining power (or “hashrate”) metric for network health and security) just reached a new all-time high above 230 million terahashes per second. On its Ropsten test network, Ethereum switched to proof of stake this month, marking an important step toward the long-awaited, energy-efficient upgrade.
Why is it important? Although this crypto winter may be the first to coincide with a significant macroeconomic downturn, it’s essential to zoom out and take the long perspective. Since the creation of Bitcoin in 2009, the cryptocurrency market has weathered numerous winters (with even greater drops in the price of BTC), and each downturn gave rise to important innovations. For example, Ethereum, DeFi, and collateralized stablecoins were all largely developed during down cycles and later emerged as crucial technologies during subsequent bull runs. What can we, therefore, anticipate from this crypto winter? “Disruptive applications and technology released during a bear market, whether equities or crypto… will always find a market and flourish,” asserted billionaire crypto enthusiast, Mark Cuban.