Experts warn that premature optimism about the impact of a possible recession on the value of the leading cryptocurrency may be unfounded.
10x Research head of research Markus Thielen noted in an April 11 report that credit spreads continue to widen, indicating increased economic concerns.
A widening of credit spreads is an increase in the difference between the yields on corporate bonds and government securities, which usually indicates increased risk in the economy. When investors demand a higher risk premium, it often portends slower economic growth or a recession.
"It is too early to expect bullish momentum," the analyst emphasized.
Short-term challenges amid long-term opportunities
While the long-term effects of the recession could be positive for bitcoin due to the monetary easing that usually follows a rate cut by the US Federal Reserve, Thielen warned of possible difficulties before the cryptocurrency finds positive momentum.
"Bitcoin usually falls first when China devalues the yuan or the Fed cuts rates, as the first decline may not be as significant and also confirms the weakness of the economy," Thielen explained.
White House adviser on cryptocurrencies and artificial intelligence David Sacks announced on April 10 on Platform X that "it's time for a rate cut" after the core consumer price index rose 2.8 percent year-over-year for March, the lowest since March 2021.
The Chicago Mercantile Exchange's FedWatch tool shows a 64.8% probability of no rate cut at the Federal Open Market Committee's May meeting of the Fed.
Historical patterns and current trends
Traders typically view falling interest rates and expanding money supply as factors positively impacting asset prices, especially bitcoin and other cryptocurrencies.
However, Thielen noted that historically, when annualized credit spreads "start to widen," bitcoin often faces additional selling pressure and takes longer to recover.
"This pattern indicates that while there may be opportunities in the long term, bitcoin will continue to be under pressure in the near term," Thielen said. He added that currency devaluations have also historically had a negative impact on markets in the short term before becoming positive in the long term.
These observations come amid growing concerns among market participants about a weakening U.S. dollar.
The U.S. Dollar Index (DXY) stands at 100.337, marking a drop of 2.92% over the past five days, according to TradingView. Analyst resource The Kobeissi Letter wrote on April 10 on Platform X: "The U.S. dollar has left the room. Something broke again."
Meanwhile, BlackRock's head of digital assets Robbie Mitchnick said in late March that bitcoin would thrive in a recession. "I don't know if there will be a recession or not, but a recession would be a powerful catalyst for bitcoin," said Mitchnick.
Economic uncertainty and a weakening dollar create a challenging backdrop for the cryptocurrency market. Bitcoin's long-term prospects remain positive, but investors should be prepared for possible volatility in the near future.
