While some analysts remain optimistic about the current reality, there are numerous signs that a global recession is coming.
The question is: what are the most worrying developments that indicate that a global financial crisis will occur in the near future? And how will a potential recession affect bitcoin?
Signs of an impending recession
The emergence of COVID-19 at the beginning of 2020 caused great chaos in the global economy.
The pandemic and lockdowns imposed by governments to contain the spread of the virus have caused a significant shift in consumer behavior towards digital services and cashless payment methods. The demand for home offices has skyrocketed worldwide.
With reduced freedom of movement, production problems and a surge in demand, supply chains have been disrupted and several sectors of the global economy, such as travel, aviation and hospitality, have been hit hard.
The overall impact of COVID on the economy caused a sharp collapse in March 2020. However, while it caused a significant short-term drop in the overall market, the performance of some commodities such as gold, cryptocurrencies, an increase in central bank quantitative easing (QE) and the gradual lifting of pandemic restrictions led to a quick recovery.
However, while QE and government stimulus helped the economy get back on its feet, massive money printing pushed inflation to record levels. In April 2022, inflation in the euro area reached a historic high of 7,4% per year, and in March 2022, the highest rate in the last 40 years was recorded in the United States - 8,5%.
In addition to the pandemic, the ongoing military conflict between Russia and Ukraine, as well as Western sanctions against the Kremlin, added fuel to the fire. By increasing inflationary pressure on the world economy, the war disrupted the energy market and raised the risk of new crises, such as global food shortages.
As a result, while consumer sentiment fell to new lows since the stock market crash in November 2011, the S&P 500 (-13,31%), NASDAQ 100 (-23,15%) and DJIA (-9,22%) suffered huge losses since January 1st.
At the same time, bitcoin has lost more than 31% of its value this year, and the crypto industry, which is fighting Terra’s depeg stablecoin UST, has seen its market capitalization fell by 45%, from $2,2 trillion. up to $1,2 trillion. around May 29th.
Given all this, the chances of a coming recession in the global economy seem too great to ignore. The real threat is that central banks don't have access to monetary instruments like QE because fiat inflation is out of control.
As a result, central banks – even in the US and the European Union – have a global tendency to raise interest rates to keep inflation under control. Since this is accompanied by a significant increase in the cost of loans, it is expected that this will lead to lower consumer and corporate spending, which will lead to a decrease in the overall demand for goods and services.
But will the government manage to keep inflation under control during a recession?
How will Bitcoin behave during the financial crisis?
From a Bitcoin perspective, fiat currency inflation is generally a good thing. Unlike the Fed, the ECB or other central banks in the world, it is impossible tomine more BTC than the maximum supply of 21 million coins as this is hardcoded at the protocol level.
Moreover, while bitcoin will experience some inflation until it reaches its maximum supply in 2140, the halving serves as a deflationary mechanism that reduces the supply of new coins by 50% roughly every four years.
Apart from these two critical qualities, the Bitcoin network is completely decentralized and has the longest history of superior sustainability of any cryptocurrency.
For these reasons, BTC is used as a store of value and inflation hedger, which can become increasingly volatile in short periods but retain its purchasing power in the long run. Historically, inflationary monetary policy has had a positive effect on cryptocurrencies.
However, suppose that central banks decide to raise interest rates to reduce inflation. In this case, part of the crypto community expects the price of bitcoin to fall in the near future due to a significant reduction in economic stimulus and consumer spending, especially if this move triggers a global recession.
However, Bitcoin has very similar qualities to gold, a scarce precious metal that has historically experienced bullish price trends in times of crisis.
Additionally, freezing Russia's $300 billion of foreign reserves held in Western countries could lead to a new trend, with countries increasingly allocating billions in BTC instead of US and EU debt assets.
According to BitMEX co-founder Arthur Hayes, this will create even more inflation for Western economies through yield curve control (YCC), which, in his opinion, will raise the price of bitcoin to $1 million, and the price of gold to $10 - $000.
Demand for BTC will rise due to fiat inflation
With major disruptions caused by the COVID-19 pandemic, the Russian-Ukrainian conflict, and high inflation, many signs point to an approaching recession.
While it's hard to predict exactly what will happen to BTC during an economic crisis, record inflation tends to increase demand for scarce assets like Bitcoin and gold as investors seek to maintain their purchasing power.
And despite moves by central banks to raise interest rates, the recent sanctions against Russia could cause significant changes in how capital-abundant countries spend their money. This, in addition to adjusting the yield curve, is expected to lead to higher inflation, which in turn will increase the demand for BTC and gold.
At the same time, since the Central African Republic, following Following in the footsteps of El Salvador, which made bitcoin legal tender in April, BTC could also experience positive price momentum due to the rise in bitcoin adoption among smaller economies.