While some analysts remain optimistic about the outcome, multiple signs indicate an upcoming global recession.
The question now is: what are the most alarming events indicating that a worldwide financial crisis would happen in the near future? Also, how would a potential recession impact Bitcoin?
Signs of a Looming Recession
COVID-19’s emergence in early 2020 caused great havoc to the world economy.
The pandemic and the lockdowns imposed by governments to curb the spread of the virus fueled a significant shift in consumer behavior towards digital services and cashless payment methods. There was a sudden increase in the global workforce’s demands for home offices.
Due to limited free movement, production issues, and demand spikes, supply chains got disrupted, and several sectors of the global economy such as travel, aviation, and hospitality took a huge hit in revenue.
The overall impacts of COVID on the economy fueled a flash crash in March 2020. However, while it caused a significant short-term fall for the general market, the performance of certain commodities like gold, crypto, the central banks’ increased quantitative easing (QE), and the gradual lift of pandemic restrictions have led to a rapid recovery.
However, while QE and government stimulus helped the economy get back on its feet, the massive money printing raised inflation to record levels. In April 2022, the Euro Area reached an all-time high in terms of inflation at 7.4% annually, while the US experienced its highest rate in 40 years at 8.5% in March 2022.
On top of the pandemic, the ongoing military conflict between Russia and Ukraine, as well as Western nations’ sanctions against the Kremlin, added fuel to the fire. While it raised the inflationary pressure on the world economy, the war disrupted the energy market and increased the risks of new crises, such as a global food shortage.
As a result, while consumer sentiment dropped to new lows since November 2011’s stock market crash, the S&P 500 (-13.31%), NASDAQ 100 (-23.15%), and the DJIA (-9.22%) have all experienced huge losses since January 1.
At the same time, Bitcoin lost over 31% of its value this year, while the crypto industry – which has been struggling with the depeg of Terra’s UST stablecoin – saw its market capitalization sink 45%, from $2.2 trillion to $1.2 trillion around May 29.
Considering all this, the chances of an upcoming recession hitting the global economy seem too great to ignore. What makes it a real threat is that central banks do not have access to the same monetary tools like QE due to fiat currency inflation getting out of control.
Due to the latter, it’s a global trend among central banks – even in the United States and the European Union – to increase interest rates to keep inflation under control. As this comes with a significant rise in the cost of credit, it is expected to depress both consumer and corporate spending, pushing down overall demand for products and services.
But will the state manage to keep inflation in check during a recession?
How Will Bitcoin Perform During Financial Crisis?
In terms of Bitcoin, fiat currency inflation is usually a good thing. Unlike the Fed, the ECB, or other central banks throughout the world, it’s not possible to mint more BTC than its maximum supply of 21 million coins, as it is hardcoded on the protocol level.
Furthermore, while Bitcoin will still experience some inflation until it reaches its max supply cap in 2140, the halving serves as a deflationary mechanism that reduces the inflow of new coins by 50% roughly every four years.
Besides these two crucial qualities, Bitcoin’s network is fully decentralized and features the most extensive history of excellent resilience among all cryptocurrencies.
For these reasons, BTC has been utilized as a store of value and an inflation hedge that can become increasingly volatile during shorter periods but is set to retain its purchasing power in the long run. And historically, inflationary monetary politics have impacted the cryptocurrency in a positive way.
However, suppose central banks decide to hike interest rates to reduce inflation. In that case, a part of the crypto community expects Bitcoin’s price to fall in the near future due to the significant decrease in economic stimulation and consumer spending, especially if this move triggers a global recession.
In addition to that, the freeze of $300 billion worth of Russia’s foreign reserves held in Western countries could lead to a new trend in which countries increasingly allocate billions to BTC instead of US and EU debt assets.
According to BitMEX co-founder Arthur Hayes, this will create even more inflation for Western economies via yield curve control (YCC), which he believes will boost Bitcoin’s price to $1 million and gold’s value to between $10,000 and $20,000.
BTC Demand to Increase With Fiat Inflation
With major disruptions fueled by the COVID-19 pandemic, the Russo-Ukrainian conflict, and the high rates of inflation, many signs point toward a looming recession.
While it’s hard to accurately predict what will happen to BTC during an economic crisis, record rates of inflation tend to increase demand for scarce assets like Bitcoin and gold, as investors aim to retain their purchasing power.
And, despite central banks’ moves to hike interest rates, recent sanctions against Russia could cause a significant shift in how capital surplus nations spend their money. This, in addition to yield curve control, is expected to increase inflation that, in turn, will raise demand for BTC and gold.
At the same time, with the Central African Republic following El Salvador’s footsteps to make Bitcoin legal tender in April, BTC could also experience positive price action due to increased adoption among smaller economies.