Crypto Crash Worsens with U.S. Recession Fears, Leaving Investors Concerned About the Stability of Bitcoin and Ethereum

The cryptocurrency market has spiralled since major coins such as Bitcoin and Ethereum posted huge losses in recent months. By August 2024, Bitcoin had lost more than 30% of its year-to-date value, while that of Ethereum was off by more than 25%. This crypto crash has come just at a time when fears of an impending recession in the United States are ratcheting up and begging questions about the relationship between them.

A sharp drop in global financial markets was witnessed across the board. Bitcoin shaves almost 8% off its price and tumbles down all the way to the $54,500 mark of the cryptocurrency. It recovered from the worst of the pullback at one point; it was trading below $50,000. Meanwhile, a flight from risk assets also hit Ether, which fell 13.3% in the past 24 hours.

Crypto-focused exchanges such as Coinbase and miners like Riot and Marathon Digital were all down about 2.8% to 4.3% by midday. Cleanspark, though, was a big outlier, falling about 12% compared with all the mining stocks. At one point, it was down double digits earlier in the morning.

The U.S. Economy on Shaky Ground

The economy of the United States has exhibited some weak signs in recent weeks, with various indicators indicating that there may be a recession. Treasury Secretary Janet Yellen warned that the government would soon have no money to pay for its bills by June since expenditure seems to be higher than projected. 

President Joe Biden urged Republicans and Democrats to begin negotiating an increase in the nation’s debt limit next week, saying he would prefer the country to slide into recession rather than have the parties fail to reach a compromise on key Democratic spending programs.

Recent economic data have also fostered fears of recession. The U.S. GDP recorded an annualised growth of only 1.1% in Q1 2023, from 4.4% growth in Q4 2022, a sharp decline from the previous quarter. The unemployment rate went up to 4.3%, which brought back worries over the weakening labour market. The Sahm Rule Recession Indicator now signals over 0.50, indicating the first phases of recession in the economy of the United States.

One of the drivers of the overall market selloff is the Japanese market. Tezos co-founder Kathleen Brightman also weighed in on what could be behind the crypto tumble.

It’s something similar to what happened at the beginning of COVID and during the recession—the first thing people decide to sell is their pretend internet money. Bitcoin takes a bit of a shellacking because it’s definitely cast more as a speculative currency; it is not treated the same as a lot of other equities.

The recent drop in prices has chewed into both Bitcoin and Ether’s gains for the year to date. Both were still well in the green, with Bitcoin up 28 per cent since January and Ether lagging the S&P 500, having risen only 8 per cent in that time. Ether did, at one point, erase its year-to-date gain.

The CIO of Bitwise Asset Management talks about the crypto route and where he thinks the market could be headed. Matt Hougan from Bitwise said the route is at risk. While assets, crypto, are no strangers to volatility or even 30% drops in a bull market, it’s quite different every year as Bitcoin matures more and more.

He says this is an opportunity that feels exactly like Mar 12, 2020, which was the last time a coordinated global selloff took place in capital markets. It was on that day when it finally realised that covid was impacting the global economy massively.

Vulnerability of the Crypto Market

The crypto market has so far been very vulnerable to such economic uncertainty rattling the U.S. economy. As the world’s biggest economy, the contribution by the U.S. is pretty big towards the world crypto market. According to a report by Grand View Research, the size of the U.S. cryptocurrency market was pegged at $1.19 billion in 2022, thereby making it one-fourth of the total crypto market cap.

The crypto crash could, of late, be attributed to a mix of factors that include regulatory pressure, security concerns over blockchains, and the collapse of central players like FTX. The largest driver would probably have to be U.S. recessionary fear, though.

The economy of the U.S. is softening, and investors are fast becoming averse to risk. This course pulled the money out of speculative assets like cryptocurrencies. This resulted in major coins losing face value, with Bitcoin and Ethereum at the helm of loss.

Fed’s Role in Crypto Crash

The Federal Reserve has had much to do with the crypto crash. It has increased interest rates 11 times since November 2021 to try to rein in rising inflation. As interest rates rose, risky assets like cryptocurrencies became less attractive. Facing increased borrowing costs, investors were much less willing to take the risk of investing in speculative investments, thus selling off in crypto markets.

The Fed’s actions have also chartered fears of a recession in the U.S. economy. Aggressive raising of interest rates cooled economic growth; this reduced consumer spending and, with it, business spending. This, in turn, reduced the labour market, where firms from technology, automotive, financial services, and retail announced layoffs.

The Crypto Market: Its Uncertain Future

However, most analysts are divided on whether the market will recover or continue declining, thus setting the future of the crypto market quite bleak. Other analysts have a view that once the economy of the U.S. is stabilised and the Fed starts cutting interest rates, it is bound to bounce back. According to them, this crypto market can turn into a hedge against inflation and economic uncertainty, which would eventually make it an attractive investment opportunity for risk-tolerant investors.

Other analysts, however, are highly pessimistic about the prospects of the crypto market. Their opinion is that the crypto market represents an ultramodern and relatively untested class of assets; any economic shock will render this market highly vulnerable. They point to the regulatory uncertainty that currently characterises the crypto market, thereby rendering this market with very meagre growth potential in the long run.

All these are not isolated events; the crypto crash is inextricably connected to the impending U.S. recession. This is because investors have turned their backs on speculative assets like cryptocurrencies due to a weakening U.S. economy. Aggressive interest rate hikes by the Fed have acted as the final nail in the coffin, with major coins sliding and reigniting fears of a recession.

For the crypto market to really stabilise and recover, the U.S. economy has yet to slow down, but it will probably remain so unpredictable and turbulent. Any investment advice regarding cryptocurrencies should include an investor warning, as it has been an ultra-speculative market trying to bear all jolts coming from economic shocks.

The U.S. government and the Fed have to do everything in their capacity to soften the raging economic storm blowing across the country, especially averting any current risk of recession. This may be through fiscal and monetary policies that assist in revving up economic activities and providing help to businesses and consumers.

In particular, the crypto market will continue to be a thorn in the side of investors and policymakers. From what has been witnessed so far, it is very clear that the crypto crash and the U.S. recession will forever be attached, with possible effects on the global economy for years to come.