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Bitcoin (BTC) was created in reaction to the worldwide crisis of 2008. It created a new way to do business without relying on the faith of third parties, such as banks, especially failing institutions that the government bailed out at the expense of the people.
"The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust," Satoshi Nakamoto wrote in 2009.
Embedded in the genesis block of Bitcoin is the following sentence that summarizes its purpose: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."
Bitcoin continues to mine blocks without interruption, and its gold-like features have attracted investors seeking “digital gold.” However, its recent 75 percent decline from its November 2021 high of $69,000 illustrates that it is not immune to global economic pressures.
During the same period, the whole crypto market lost $2.25 trillion, indicating widespread demand destruction in the sector.
The Bitcoin crisis occurred amid a time of growing inflation and hawkish central bank responses to it. Notably, the Federal Reserve increased its benchmark interest rates by 75 basis points (bps) on June 15 to reduce inflation, which had reached 8.4 percent in May.
In addition, the drop brought Bitcoin’s performance closer to that of the tech-heavy Nasdaq Composite. Between November 2021 and June 2022, the U.S. stock market index declined by nearly 30%.
In his testimony before Congress, Fed Chairman Jerome Powell stated that the Fed’s rate rises will continue to reduce inflation but added that “the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy.”
According to a Reuters survey of analysts, the Fed will boost benchmark interest rates by an additional 75 basis points in July and an additional 0.5 percentage points in September.
Informa Global Markets, a London-based financial intelligence organization, remarked that this adds further negative potential to an already sinking crypto market. It will not bottom out unless the Fed modifies its “aggressive approach to monetary policy.”
However, a U-turn on aggressive policy seems unlikely in the foreseeable future, given the central bank’s inflation objective of 2 percent. Intriguingly, the difference between the Fed’s funds rates and the consumer price index (CPI) is the highest ever recorded.
According to a study of 49 respondents done by the Financial Times, over 70% of economists anticipate that the U.S. economy will enter a recession owing to the Fed’s aggressive stance next year.
In summary, a nation enters a recession when its economy has a prolonged period of harmful gross domestic product (GDP), growing unemployment, dropping retail sales, and reduced manufacturing production.
Notably, 38 percent forecast the recession to begin in the first half of 2023, while 30 percent believe the same will occur in the third and fourth quarters. In addition, a second study by Bloomberg in May indicates a 30% chance of recession next year.
Powell also stated in his press conference on June 22 that recession is “certainly a possibility” owing to “events in the last few months across the world,” including the Ukraine-Russia conflict, which has generated a global food and oil crisis.
The forecasts risk placing Bitcoin ahead of a full-scale economic disaster. And the fact that it has not acted as a safe-haven asset during the era of rising inflation enhances the likelihood that it will continue to decline along with the Wall Street indices, especially tech companies.
Meanwhile, the collapse of Terra (LUNA, later renamed LUNC), a $40 billion “algorithmic stablecoin” project, led to bankruptcy troubles at Three Arrow Capital, the largest crypto hedge fund has devastated demand across the crypto industry.
During the present bear cycle, the price of Ether (ETH), the second-largest cryptocurrency after Bitcoin, fell by more than 80 percent to $880.
Similarly, other top-tier digital assets, including Cardano (ADA), Solana (SOL), and Avalanche (AVX), dropped between 85 and 90 percent from their 2021 high.
Edward Moya, a senior markets analyst at the online forex broker OANDA, stated, “The crypto house is on fire, and everyone is just, you know, rushing to the exits because there’s just completely lost confidence in the space,”
Leigh Drogen, general partner and CIO of Starkiller Capital, a digital assets quantitative hedge fund, forecasts that the currency will approach $10,000, representing a decline of 85 percent from its all-time high.
However, there is no evidence supporting Bitcoin’s complete extinction, given that the currency has faced six bear markets (based on its 20 percent-plus losses) in the past, followed by a recovery above the previous record high.
Nick, an analyst from the data site Econometrics, observes that Bitcoin is still in the “middle of an adoption curve,” acting as a stock market index.
Bitcoin is expected to decline further in the context of rising interest rates, similar to how the U.S. benchmark S&P 500 has fallen numerous times over the past century before recovering again.
“Between 1929 and 2022, the S&P500 is up 200x. That’s something like a 6% annualized rate of return […]. Some of those asymmetric bets are obvious and pretty safe, like buying Bitcoin now.”
Unfortunately, this is not true of all coins on the cryptocurrency market. Many of these so-called alternative cryptocurrencies, or “altcoins,” have died this year, with some low-cap coins experiencing price drops of over 99 percent.
Nonetheless, programs with reasonable adoption rates and actual users might emerge victorious in the event of a worldwide economic collapse.
Ethereum, the dominant innovative contract platform, leads the layer-one blockchain ecosystem with over $46 billion locked across its DeFi applications, making it the leading choice to date.
Other chains, such as Binance Smart Chain (BSC), Solana, Cardano, and Avalanche, may also be able to draw users as alternatives, hence assuring demand for their underlying tokens.
Meanwhile, older cryptocurrencies such as Dogecoin (DOGE) have a greater chance of surviving, especially given rumors of a potential Twitter inclusion.
A macroeconomic-driven bear market is anticipated to harm all digital assets in the coming months.
Alexander Tkachenko, creator and CEO of VNX, a digital gold trader, told Cointelegraph that currencies with smaller market capitalization, less liquidity, and greater volatility would be at a higher risk of collapse.
He added: “If Bitcoin and other cryptocurrencies want to get back to their full power, they need to become self-sufficient alternatives to fiat currencies, especially the U.S. dollar.”