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

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By Frances Yue

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, 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 had 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 degree, last year’s performance was already priced in to the expectation that we were heading into a weaker economy,” Hougan said.

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 recession like most people are predicting, I think crypto will basically ignore it. It’s already priced in and has the growth to ride it out,” 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 U.S. dollar index, an indicator of the greenback’s strength against other major currencies around the world, rose more than 8% in 2022 but has fallen more than 2% so far this year, according to Dow Jones market data.

Lis: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. The US dollar and greenback pegged stablecoins are still among the largest trading pairs for bitcoin by volume, according to data from several crypto 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 coming out of US Treasuries, weakening the dollar, strengthening other currencies, including cryptocurrencies,” says Eberlé.

Bitcoin Halvings

Besides the macroeconomic environment, several other factors can affect the price of bitcoin.

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 crypto and limit its maximum supply to 21 million. The next halving is expected to take place in April 2024.

“Historically, the 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.”

-Frances Yue

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(END) Dow Jones Newswire

05-07-23 2131ET

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