What Will Bitcoin do During Economic Turbulence?

Where does bitcoin go from here, is a question currently being asked with regard to its precipitous drop, the possibility of a bear market bottom forming, or alternatively, another leg down still to come. Looking further ahead, there are questions about its outlook for the next several months and years, given the precarious macro possibilities, and unknowns around what bitcoin, as new tech, currency, or a misunderstood asset, might actually be used for.

In the immediate future, there are a multitude of ominous factors suggesting that bitcoin could dip further. News of Treasury yield curve inversion suggests recession is a possibility in the US, and further rate hikes from the Fed are expected this month, creating a bleak economic outlook for the near term.

It was reported that bitcoin miners are capitulating and selling coins, and there is the continuing fallout and all-round shakiness resulting from the collapse of over-leveraged crypto entities such as Three Arrows Capital, Celsius and Voyager, and going back to the Terra network implosion.

Also looming is the possibility of a significant amount of bitcoin being dumped on the market by Mt Gox. From 2010 to 2014 Mt Gox became the biggest bitcoin exchange, but that ended when it filed for bankruptcy after being hacked and losing 850,000 BTC.

Fast forward to July 2022, and creditors who lost their coins have received a communication from Mt Gox informing them that repayments are coming, perhaps in August, with 137,000 BTC recovered and expected to be returned.

The resulting question is how many of those creditors will immediately sell their coins (considering that they are hugely in profit after a multi-year forced HODL), and what effect such a dump might have on prices. The feared consequence is an immediate price crash, but optimists believe not all creditors will sell and the hit can be absorbed.

One thing for sure is that it would be quite a story if Mt Gox managed to crash the market twice despite not having been in operation for approaching a decade, but anything can happen in crypto.

On the other hand, on-chain signals and historical patterns indicate that bitcoin is oversold and in an accumulation zone. A report from crypto analytics firm Glassnode concludes that: “the present market structure has many hallmarks of the later stage of a bear market,” while adding that there is, “perhaps further downside risk to fully test investor resolve and enable the market to establish a resilient bottom.”

It is also of note that previous bear market bottoms did not go lower than the corresponding previous cycle’s all-time high, but in this current bear phase that level (the 2017 cycle high of $19,783) has been breached, meaning that prices have already touched lower than many would have expected and that patterns can be broken and nothing should be taken as a given.

Overall, it is a mixed picture for bitcoin, and while there are certainly DCA-ers looking at this current phase as a welcome accumulation opportunity, there is no shortage of unrushed onlookers waiting for a bigger discount.

With all this in mind, no one can predict with certainty where bitcoin will go next, but a number of factors that are perhaps unique to this nascent asset should be kept in mind.

Firstly, by comparison to traditional markets, bitcoin and crypto move fast and sentiment can switch rapidly. When collapses occur, they may be dramatic, but, by the same token, positive turnarounds can play out at speed.

Also, there is an adage that at any moment, bitcoin will not act as most people are expecting. That could, though, be endlessly looped around: if enough people expect it to do something unexpected, then the most unexpected outcome would then be for it to range along doing nothing at all.

And, then there is the uncertainty around how bitcoin would actually perform in a recession, or some variety of financial catastrophe (think runaway inflation, supply line disruptions, energy shortages, proxy and direct wars, the national hangovers resulting from disastrous lockdown policies, civil unrest and the whole long litany of strife clamouring for attention on the news and social media).

Bitcoin emerged from a financial breakdown precisely in order to provide an alternative, or a solution, to economic and social dysfunction. What we may be facing now, around the world, is arguably worse than the financial crisis of 2008, and has the potential to spiral out of control.

Thirteen years after the chaos from which it was created, and thirteen years older as an asset and a movement, is bitcoin now positioned to thrive not only when fiat is being printed with abandon, but when the tap has been turned off and reality steps in?

If you’re a bitcoiner then you’ll be comfortable with price volatility, and unperturbed by what is unfolding economically, since bitcoin channels have been consistently predicting such events. At the same time, one can’t help but think that this is precisely the kind of moment that bitcoin was built to address.

Perhaps, from a bitcoin point-of-view, it is a valuable opportunity to sit back and learn about how a strengthening new asset class behaves in uncharted territory.