The coming recession will hit crypto, but not as hard as you think

• “The shame of people’s disposable income caused by high inflation has had a major negative impact on stocks and crypto markets.”
• “We are now in a very volatile economic environment, so it is almost impossible to look much further ahead with any degree of confidence.”
• “We do not need a return to economic growth to kickstart the crypto market, we need an improvement in the Nasdaq index of technology stocks.”
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If a recession is not already here, many economists estimate that it will come very soon. The largest in the world, the US economy, contracted by 1.6% in the first quarter of this year, and although it somehow did not contract in the second quarter, an increasing number of economists predict a recession for 2023.

There is no doubt that this is a bad time for the global economy right now, with inflation reaching 40-year highs and central banks threatening a series of rate hikes. It is also a bad time for the crypto market, as prices have fallen sharply at about the same time as economic activity has shrunk.

But opinions are mixed on whether we will see a severe recession in the coming months (or years), and it is also mixed whether such a recession will have a major impact on large cryptocurrencies. This is because there is an argument that the prices of cryptocurrencies are not correlated with the global economy as much as the stock markets, which may rise again if inflation declines and interest rate rises stop.

A recession is already damaging crypto

Many economists and analysts seem to agree that the United States – and many other developed economies – are already in recession, given that the technical definition of a recession is two consecutive quarters of negative growth.

“The squeeze on people’s disposable income caused by high inflation has had a major negative impact on equities and crypto markets, and has probably already pushed the US economy into recession. Recent consumer confidence surveys show the worst measurements in decades, people feel the pain and cut back on both investment and spending, says Glen Goodman, a cryptoactive analyst and author of The crypto handler.

Despite a general consensus that the economy is shrinking right now, some commentators also highlight the role, not only of inflation and interest rate hikes, but also of a sharp withdrawal of fiscal support (which had previously come in the form of quantitative easing).

“The bottom line is that 2022 is the hangover from one of the biggest asset price bubbles in history due to unique liquidity, fiscal and monetary policy. biggest [Federal Reserve (Fed)] interest rate increase in a meeting since 1994 (75 bps in June), »said Bloomberg intelligence Senior Product Strategist Mike McGlone.

For him, a prolonged recession is not a given, but what is more likely is that the current downturn will act as a kind of catalyst for a fundamental contraction of the crypto market. In other words, the current economic climate may be part of a process that sees the cryptocurrency market lose “silly speculations about things like Shiba Inu” and other smaller altcoins.

“Recession is less secure than reversal in asset prices and the around 20,000 cryptocurrencies listed on CoinMarketCap show the problems with too many offers and easy access – price headwinds. I fully expect the primary recipients – bitcoin (BTC), ethereum (ETH) and the spread of cryptocurrencies [, or stablecoins] – to remain intact and bitcoin to continue the process of becoming the benchmark for digital security in a world that goes that way, he said Cryptonews.com.

How bad can things get?

Although there is little doubt that advanced economies are already contracting, if not in a direct recession, analysts are not entirely convinced that things can be bad for a long time. This gives hope that the current bear market may not exceed its welcome.

“For the foreseeable future, I’m actually quite optimistic because commodity prices are plummeting. Oil, gas, copper, cotton, wheat, corn and many other important raw materials are now far below their peak prices, and this should help bring inflation down very soon, said Glen Goodman.

In fact, oil prices have fallen repeatedly in recent weeks, dragged down by fears of recession. This may end up initiating a kind of self-correcting mechanism, with reduced prices that will eventually lead to more economic activity and growth.

“Hopefully it will mean that the US economy starts to recover quickly, but how long this relief will last is anyone’s guess. We are now in a very volatile economic environment, so it is almost impossible to look much further ahead with any degree of self-confidence, ”said Goodman.

While there is a chance that a recession may last more than a few quarters, Mike McGlone suggests that it will not be particularly severe or deep. This is largely because it would be part of an almost natural rebalancing of the economy, away from excessive liquidity.

“We have reached the limits of pumping liquidity into the system […] So the Fed will be very reluctant to ease until the whites in the eyes of deflation are pretty clear. The implications for a longer period of poorer results, especially for the stock market, are clear and far from profound given the high level [of excess liquidity],” he said.

In this environment, McGlone said he expects BTC, US long-term bonds and gold to be top performers, although he accepts that there will be bumps in the road as the economy gradually stabilizes.

End strategy

While an improvement in financial performance will ultimately benefit the cryptocurrency market, it does, according to Glen Goodman, really need an improvement in stock performance.

“We do not need a return to economic growth to kickstart the crypto market, we need an improvement in the Nasdaq index of technology stocks. Cryptos have been strongly correlated with the fall in the Nasdaq since November,” he said. Cryptonews.com.

Basically, Goodman’s prediction is that equities will rally as soon as inflation begins to decline and the Fed indicates that it will stop (or lower) interest rates. When this is going to happen, of course, is someone’s guess.

Whenever economic growth returns, Mike McGlone predicts that bitcoin will continue to be a better bet than most other assets, especially when we return to a low-inflation environment. However, he is not necessarily as optimistic about most other cryptocurrencies.

“I expect bitcoin to resume its recovery path compared to most assets, especially stocks in a deflationary environment, which I expect will last,” he said.

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Learn more:
– Bitcoin Lifeboat, Long Recovery Road and Excessive BTC Deaths: Saylor, CZ, and Professor Weigh In
– As inflation “softens”, a bottom in Crypto is likely in “Back half of 2022” – VC Investor

– Several Crypto Meltdowns can be seen this summer, but the worst is behind us – Panteras Morehead
– We now understand how little we understand about inflation – Fed’s Powell

– Bitcoin is better at coping with interest rate increases than Ethereum, shares – Report
– Soros’ fund manager says that Crypto is here to stay, warns of recession and FOMO Trap

– What is a bear market?
– These shares have fallen more than Bitcoin so far this year