According to industry experts, the increasing likelihood of an economic recession could have a different outcome for Bitcoin (BTC).
Aurélie Bertel, principal research analyst at Nansen, believes the likelihood of a recession in the second half of the year is higher than the historical average. She told CryptoSlate:
“We see a 40% chance of a recession in the second half of 2024 (30% shallow recession, 10% hard landing), higher than the historical average of 17%.”
Her prediction is based on the fact that central banks have cut interest rates 35 times in the past three months (for comparison, at the peak of the 2009 financial crisis, central banks cut interest rates 76 times).
According to Bitfinex analysts, this could impact BTC in a number of ways. For example, investors may perceive Bitcoin as a safe haven asset amid economic uncertainty. Additionally, it could lead to greater institutional participation in the cryptocurrency as investors seek to hedge against macroeconomic risks, creating a stabilizing effect on the cryptocurrency market.
The analysts said:
“This could result in increased liquidity and higher valuations for major cryptocurrencies such as Bitcoin and Ethereum.”
Fideum co-founder Darren Franceschini also believes this bullish view, as Bitcoin is seen as a hedge against economic uncertainty and inflation.
“If central banks are more likely to cut interest rates and implement more accommodative monetary policies to counter recession fears, this could lead to increased liquidity in financial markets.”
Franceschini added that some of this liquidity could flow into cryptocurrencies as investors seek alternative assets. Additionally, Bitcoin's growing popularity and recognition among a broad range of mainstream investors as “digital gold” and a store of value during economic turmoil could attract more investors to the cryptocurrency market.
Meanwhile, Bitfinex analysts believe that the overall crypto market and altcoins could take a hit due to reduced liquidity and risk tolerance, as investors may become more risk averse and pull money out of riskier assets such as smaller cryptocurrencies and into safer investments.
It also noted additional regulatory risks, as the uncertain economic environment could lead governments to impose stricter regulations aimed at protecting consumers.
Macroeconomic instability
The global economy is under pressure from multiple stressors, with the energy shock from the Ukraine war weakening euro zone growth from 2022 onwards, and a possible increase in US tariffs could further impact it, Barthele noted.
She added:
“China's growth is weakening due to the deflation of its real estate bubble and is being exacerbated by the economic war with the US. Growth in the US is slowing but apart from inflated stock market valuations (S&P 500 forward PE 20.5x) there are no obvious vulnerabilities (sound household and corporate balance sheets).”
As a result, Berser assesses there are scenarios in which stocks and risk assets suffer a correction severe enough to tighten financial conditions and trigger an economic contraction.
Bitfinex analysts also pointed to the yen carry trade, which involves borrowing Japanese yen at low interest rates and investing it in higher-yielding assets in other jurisdictions, which sparked a major collapse in global markets after Japanese borrowing rates increased.
So when investors expect the yen to strengthen or global asset returns to fall, they unwind these transactions by selling high-yielding assets and paying down yen-denominated loans.
According to analysts:
“Over the past 10 days, the yen has strengthened significantly against the US dollar, which has also driven up borrowing rates. This has caused traders and investors who had participated in carry trades to liquidate stock market positions around the world in order to repay their loans.”
The move led to a sudden unwinding that further fuelled a sharp rise in the yen, sparking a sell-off in global markets as investors scrambled to unwind positions.
Analysts at Bitfinex agree with Barthele on the validity of fears of a global recession, highlighting as key concerns still-weak economic growth forecasts, the significant amount of speculative-grade debt maturing in the U.S. in 2024, and geopolitical risks around the world, including recent tensions in the Middle East involving Israel, Iran and Palestine.
Franceschini also believes fears of a global recession are valid, but he noted that major central banks such as the Fed and the European Central Bank are still treading cautiously, and the Fed could consider cutting interest rates by 25 basis points for the first time after keeping them on hold for a year.
according to Franceschini:
“This could suggest that while underlying economic instability is growing, policymakers are not treating the situation as being as severe or precarious as the 2009 crisis.”
Mentioned in this article
