With inflation reaching new highs month after month, and the Federal Reserve taking an increasingly hawkish stance, the U.S. economy is exposed to an elevated risk of upcoming recession.
The COVID-19 recession that began in February 2020 and lasted through April of that year – the most recent in the U.S. – did, however, have a positive impact on cryptocurrencies. It shot bitcoin (BTC) to an all-time high above $28,000 and, more importantly, caused investors and Wall Street firms to start taking the largest cryptocurrency by market capitalization seriously.
But if analysts are right, and the U.S. economy is bound to go into another recession as early as next year, the cryptocurrency market could see a very different outcome this time.
Because of bitcoin’s recent strong correlation to U.S. stocks – from the Nasdaq Composite Index to the Standard & Poor’s 500 to the tech-heavy Nasdaq 100 – the largest cryptocurrency’s performance will likely depend on what the broader markets do, according to some analysts.
“Bitcoin has really bound itself to the Nasdaq in terms of correlation, and if the Fed keeps hiking rates and if the market believes [it is] going to hike rates, recession or not, Nasdaq suffers in the short term,” said Bob Iaccino, chief strategist at Path Trading Partners and co-portfolio manager at Stock Think Tank. “And if this correlation continues, then crypto suffers, too.”
The 90-day correlation between bitcoin and the tech-heavy Nasdaq 100 index has remained elevated since 2020, recently reaching a new high as shown in the chart below.
“During an extended recession I think we will see positive price movement with BTC but the rest of the crypto market would face headwinds as investors continue to move risk off and investors find it harder to raise funds in a tighter lending market,” said Howard Greenberg, a cryptocurrency educator at Prosper Trading Academy.
That strong positive correlation – not just true for bitcoin but some other large crypto assets, like ether (ETH), too – means cryptocurrency returns could suffer from a recession.
“Over the past few years they have become even more correlated to equity markets, and more recently the bond market,” said Joe Haggenmiller, head of markets at XBTO, a crypto trading platform.
“This trend may continue should we go into a recession,” he said. “We expect the major cryptocurrencies to follow the broader market on a short-to-medium term basis, on the upside and downside.”
This would be a very different scenario from what crypto markets saw during the COVID-19 recession. While bitcoin hit an all-time-hime and rose over 50% in 2020, equity markets suffered severe losses during the period between January and March 2020 before bouncing back to normal levels as the Fed stimulated traditional markets with freshly printed money.
A recession that drives down stocks might push the Fed to reverse its hawkish stance and move back to a more accommodative stance. And that could end up being a good thing for bitcoin and cryptocurrencies , according to Iaccino.
What would happen to bitcoin during a recession?
“During an extended recession I think we will see positive price movement with BTC but the rest of the crypto market would face headwinds as investors continue to move risk-off and investors find it harder to raise funds in a tighter lending market,” Greenberg said.
One reason why the correlation between crypto and the equity market is strengthening might be that traders are starting to see stocks as a hedge against inflation, just like bitcoin.
“In inflationary environments, stocks have a distinct advantage over bonds – they’re linked to companies that can adjust pricing – whereas bonds, not so much,” Lawrence Creatura, a fund manager at PRSPCTV Capital LLC, told Bloomberg.
Digital assets might see a drop in prices in the short-term, Jeff Dorman, chief investment officer at Arca, wrote in a March 28 report. But digital assets create value through network growth and brand loyalty as opposed to equity and debt, which represent a claim on assets.
“Given this backdrop, it’s possible digital assets are the only asset class that a recession wouldn’t negatively impact,” Dorman wrote.
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