Recession fears are prompting investors to seek safe havens. Is bitcoin a good choice?

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

Looking for a safe haven, some investors have turned to bitcoin BTCUSD, which has a limited supply and is often touted by its proponents as a hedge against existing stresses in the financial system and monetary policy. The crypto is up over 75% so far this year, according to data from CoinDesk.

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

Born in 2009 after the financial crisis of 2007-2008, bitcoin went through only one recession, which lasted from February 2020 to April of the same year, as the Covid-19 epidemic sent shock waves in the global economy.

Meanwhile, bitcoin has fallen over 60% in one month, from over $10,000 in February 2020 to $3,905 in March.

Nonetheless, as the Fed began easing monetary policy in March 2020, bitcoin began its bull run along with other risky assets. The crypto hit an all-time high of $68,990 in November 2020.

Bitcoin’s performance during a recession would 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 by printing money and lowering interest rates, those things tend to be good for bitcoin, Cipolaro said on a call. It’s something we’ve seen over the last 18 to 24 months.

In fact, bitcoin has already priced in some of the impending recession risks, according to Matt Hougan, Chief Investment Officer at Bitwise Asset Management.

The crypto plunged more than 60% in 2022 and hit a cyclical low of $15,480 in November, following the collapse of digital asset exchange FTX.

When we experienced such a terrible pullback last year, it was partly in response to the Fed aggressively raising interest rates, Hougan said on a call. To some extent, the past few years are sort of coming back already embedded in the expectation that we were going to head into a weaker economy, according to Hougan.

Yet if we have an extremely 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 slump like most people are predicting, I think crypto will basically ignore it. He’s already built in and has the growth to overcome it, according to Hougan.

Admittedly, the crypto market remains highly volatile, while global regulators have increased their scrutiny of the industry.

Weakening of the dollar

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

The ICE US Dollar Index DXY, an indicator of the greenback’s strength against other major world currencies, rose 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 the dollar under fire from rival countries and currencies: what will happen to the 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. Exchanges.

If a global recession hits and the Fed becomes the first of the other major central banks to start cutting interest rates, what you’ll see are dollars flowing out of US Treasuries, which weakens the dollar and strengthens other currencies, including cryptocurrencies, Eberle said.

Bitcoin Halvings

Besides the macroeconomic environment, several other factors can impact the price of bitcoins.

Some bitcoin proponents base their bullish view of the crypto for the coming months on its historical performance around the halving events.

The bitcoin halving, which takes place every four years, halves the amount of tokens miners receive as rewards. The process aims to reduce the supply of cryptos and limit its maximum supply to 21 million. The next halving is expected to take place in April 2024.

Historically, halvings have led to significant bitcoin appreciation before and after the event, said Mark Palmer, equity research analyst at Berenberg Capital Markets. In fact, what we’ve seen is that about 15 months before we get it, bitcoin tends to bottom out and then go up.

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