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Will A Recession Help Cryptocurrency
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The Block: Crypto Prices Continue To Tick Upward As Recession Fears Grow: The Week In Markets
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Bitcoin, the world’s largest cryptocurrency, was born in 2009 in the depths of the global financial crisis. It took some time to gain traction, but along with other cryptocurrencies, it quickly grew into a huge market worth around $1 trillion.
However, with the cryptocurrency market plummeting from an all-time high reached in November 2021 and the Federal Reserve raising interest rates to combat high inflation, many investors believed the economy was headed for a recession. if things go wrong.
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As investors consider the possibility of a recessionary or stagflationary environment, many are looking to assets to protect themselves from the potential storm. But experts say cryptocurrency isn’t the place to find it.
“Given the volatility of cryptocurrencies, I’m not sure they can be considered a safe haven,” said Scott Sheridan, CEO of Teishworks, an online brokerage.
Popular cryptocurrencies such as Bitcoin and Ethereum are down nearly 70% from their all-time highs as rising interest rates push investors away from riskier assets.
Sheridan said he doesn’t expect cryptocurrency prices to change until volatility, as measured by the VIX, returns to normal levels.
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“Until then, I think the combination of potential alpha in the stock market and crypto development and subsequent turmoil is more for speculation than shelter from the storm,” he said.
As a result, it will be difficult for both equity and crypto investors to achieve results until the recent level of volatility calms down.
One of the main criticisms of cryptocurrency as an investment is that it has no intrinsic value because it creates nothing for the owner. Your profit is entirely dependent on selling to someone else at a higher price. Legendary investors, including Warren Buffett and Charlie Munger, who have invested in Bitcoin and other cryptocurrencies, have been critical of the investment’s merits
“Crypto is an investment in nothing,” Munger told the Australian Financial Review in July. “I don’t want to buy anything if someone tells me I can’t make more money.”
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Even those who have a more positive view of bitcoin and cryptoassets admit that it is difficult, if not impossible, to assess the value of digital coins.
“There is no set way to value bitcoin,” said Noel Eyson, head of market intelligence at crypto lender Genesis Global Trading. “It’s narrative driven. Narrative can become a dime a dozen.”
However, Eyson said he is very optimistic about Bitcoin’s long-term prospects. He sees its use cases growing and sees it as an investment in new technology.
With crypto assets already plummeting, traders may be wondering if the worst is over. But analysts still see many risks emerging.
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“Bitcoin price has nothing to do with economic fundamentals, but sentiment does,” Eyson said. “Risk sentiment will continue to deteriorate. Markets are not pricing in how aggressive the Fed will be.”
The past few months have tested investor confidence in cryptocurrency as an investment. TerraUSD, the so-called stablecoin that trades for $1, has dropped to pennies and cryptocurrency lender Celsius Network has filed for bankruptcy. In June, a British Virgin Islands court ordered the liquidation of cryptocurrency hedge fund Three Arrows Capital.
“Institutions and major cryptocurrency exchanges are under strain, and many are on the verge of collapse,” said Tammy da Costa, an analyst at financial market website DailyFX. The collapse of Terra, Celsius and Three Arrows Capital, as well as several significant job cuts. players including Coinbase are making it even more difficult for the bull run to resume.
Fears of a recession are rising as the US economy shrinks for two consecutive quarters, which is one of the definitions of a recession, but there is no guarantee that a recession will actually happen. The U.S. economy added 528,000 jobs in July and the unemployment rate fell to 3.5 percent, according to the Labor Department.
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“We don’t currently see ourselves in any recession or stagflation scenario,” said Dr Martin Hiesboeck, head of blockchain and cryptography research at digital currency platform Uphold. “This situation is similar to what happened after World War II, when the world had years of high inflation and low growth as it recovered from the shock of the war.”
David Duong, Coinbase’s head of institutional investor research, said the crypto divestment and solvency problems for companies like Celsius and Three Arrows were due to a mismatch between short-term borrowing and long-term illiquid assets.
“This has probably wiped out the excess risk in cryptocurrency and as a result the worst performing asset class in this cycle,” Duong said.
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