Why Mounting Jitters Of A Recession May Hamper Crypto Market’s Recovery

The crypto market has been on a roll recently as it rallied with Bitcoin and Ethereum leading the charge. As a result of this, total market capitalization rose by 14% since the start of the year. 

With stocks being highly correlated with digital currencies, a worsening macroeconomic situation would be devastating for the broader financial market. But with the World Bank predicting that the global economy can slip into recession, the crypto market recovery might not happen this year. 

 As the macro trends worsen, cash that is crucial for the recovery of the market will flow out as investors flock to safe haven assets. 

World Bank Assessment Of The Situation

According to the World Bank, the overall situation is bleak. The global lender expects the world’s gross domestic product to grow by 1.7% annually which is the lowest since the last two recessions. 

Core inflation across countries is also hurting the global economy. According to the World Bank’s latest blog post, median inflation for emerging and developing economies is at 48% and 32% for advanced economies. Although this may seem high, it is actually lower compared to previous calculations.

If the global economy does slip into a recession, we can expect tighter fiscal policy for local governments. With the Consumer Price Data being released this week, we might have a glimpse as to what the U.S. Federal Reserve is up to. 

Outlook For The Broader Crypto Market

Major cryptocurrencies like Bitcoin and Ethereum have high correlation with major indices like the S&P 500 and Nasdaq. This would be disastrous for crypto as this would mean that wherever stocks go, it would follow suit. 

And with the markets anticipating a better CPI, a higher inflation rate might make the broader financial markets tumble, pulling digital currencies down. Adding on the downward pressure is the fear, uncertainty, and doubt already present in the market. 

As of writing, the king cryptocurrency Bitcoin surged past the $18,000 mark, making investors feel that the recovery is at hand. However, external market pressures like macroeconomic trends will have an effect on how Bitcoin reacts to slight price changes. 

Crypto total market cap at $843 billion on the daily chart | Chart: TradingView.com

This rally can be met with resistance if the CPI data come back higher than previously thought. With the U.S. central bank already hawkish about the market, we might see more pain in both crypto and stocks. 

This would have a different result in safe haven assets like gold and bonds. Both crypto and stock investors should keep a close eye on the release of the CPI as it will have a great effect on their portfolio. 

-Featured image by World Bank Blogs

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