How Economic Downturns Could Hit Cryptocurrencies Hard

A storm is brewing. The U.S. economy is showing signs of heading into a recession, with key indicators pointing to this possibility. This shift has sparked fear among investors, prompting many to move towards safer assets, while others are preparing to do the same. As risk assets, cryptocurrencies could be particularly affected.

Here’s why the crypto industry should be on high alert.

Urgent Recession Warning Signals

Sahm Rule Indicator

The Real-time Sahm Rule Recession Indicator, a reliable tool for predicting recessions, has been on the rise. In April 2023, it was at the baseline of 0.00, but it has been climbing steadily since. By January 2024, it reached 0.20, then rose to 0.43 in June, and hit a yearly high of 0.57 in August, largely triggered by the July Jobs report.

This upward trend suggests increasing recession risks that investors need to watch closely.

Inverted Yield Curve

The 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity chart shows an inverted yield curve, a classic recession signal. This curve first dipped below the baseline in July 2022 and has struggled to recover, now sitting slightly above it at 0.02. In contrast, it was as high as 1.56 on April 5, 2021. An inverted yield curve happens when long-term interest rates fall below short-term rates, often seen before a recession.

Will Stock Market’s Volatility Hurt Bitcoin?

Stock market volatility can heavily influence cryptocurrencies. The VIX Index, which measures market volatility, has climbed to levels seen during the COVID-19 crisis and the 2008 financial crash. If stocks take a significant hit, cryptocurrencies are likely to suffer as well, making them vulnerable in this uncertain environment.

Is There Any Hope Left?

A key factor to watch will be how investors react to the Federal Reserve’s proposed interest rate cuts. If these cuts reverse current trends and ease investor fears, they could boost the crypto market. However, if uncertainty continues, the outlook for cryptocurrencies could remain bleak.

With the U.S. economy nearing a recession, the crypto market is facing a challenging time. Investors should stay alert and be prepared to adjust their strategies.

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