Can the financial crisis end the crypto bull run?

These are pivotal times for the blockchain and crypto sector.

In the year In the first half of 2024, Bitcoin ETFs were launched on Wall Street, a major US presidential candidate came out in favor of cryptocurrencies, and BTC showed its fourth four-year “half” and reached a new market high.

Moreover, Ether — the world's second-largest cryptocurrency — stands at another milestone, with the Ether ETF likely to launch in the US as early as July 8.

But crypto doesn't exist in a vacuum, and the outside world has become an unsafe place, with several major wars, extreme weather events, and ongoing inflation.

Given the circumstances, a cross-border collapse in the traditional financial system is not unthinkable by the end of the year.

So, if the TradFi crisis is real, what will happen to the latest crypto bull run?

Tradfi riots “can't be avoided”

“It is certainly possible that major corrections will be made in the financial markets, even if they do not lead to a full-blown crisis,” said Paolo Tasca, an economist and founder of the Center for Blockchain Technologies at University College London. Magazine.

The trigger? It may be a correction in AI stocks, “but the main market is debt in my opinion,” says Tasca. The US is running large fiscal deficits, which makes interest rate cuts unlikely, and as a result, bond and equity markets “could suffer from continued restrictive monetary policy.”

Sustained inflation, geopolitical tensions, as well as “the speculative nature of some asset bubbles, including those in the technology and AI sectors,” added Yu Xing, director of the Surrey Academy for Blockchain and Metaverse Applications. Surrey Business School. “A global financial crisis cannot be avoided in 2024,” Xiong told the magazine.

Elsewhere, as measured by the Shiller ratio, global equity prices remain high, more than double the historical average that stood at 35.64 on June 17.

“Equity markets, particularly in the technology and growth sectors, are already overvalued – except for AI. A correction could create broader market volatility,” said Nigel Green, CEO and founder of Dever Group.

Also, “continuing conflicts like Gaza-Israel or escalating geopolitical tensions like the Taiwan issue could lead to economic disruption and investor uncertainty,” Green told the newspaper.

“Seek Refuge in Decentralized Assets.”

What should one expect crypto-wise if the entire global economy goes south?

“Historically, during the onset of financial crises, all assets, including cryptocurrencies, see a selloff as investors seek equity,” Xiong says. The market price of crypto may decrease, among other things.

By the middle of the session, after the initial shock subsides, “there could be a recovery phase where investors seek refuge in decentralized assets, which could reignite the crypto bull run,” he continues.

In the long run, however, the benefits of blockchain-based technologies should prevail: “Due to the strong development of AI, many people will be pushed to use blockchain and other decentralized technologies, which will empower individuals.

So, while cryptocurrencies may experience instability with the TradFin crisis in 2024, they are “likely to become mainstream [crypto] The breakdown is not high,” Xiong says. “Of course, in the long run, such a crisis can greatly increase crypto adoption.”

“Unpredictable”

Many agree that economic crises are cyclical events, and for that, a historical perspective can be useful.

In the year Asked about the global economic crisis of 2024, Mark Higgins, Investing in US Financial History: The Past to Predict the Future, a book that explains the economic forces that have shaped American financial history since 1790, says:

“The only thing I can say is that if a crisis does happen, it's usually a disaster that most people don't see, rather than a disaster that people fear the most.”

The Panic of 1819 had its origins in the eruption of Mount Tambora in 1815 and the subsequent crop failure. In the year The Panic of 1907 was sparked by the 1906 San Francisco earthquake. The global Covid-19 pandemic triggered the market panic of March 2020. Few, if any, of those financial explosions were anticipated, Higgins explained.

Where are things today? “Currently the risk of a financial crisis is relatively high due to inflation and tight monetary policy, but one cannot predict when and if it will happen,” Higgins commented.

Is BTC a safe place?

Some observers argue that crypto is — or is on the verge of becoming — an uncorrelated financial asset, meaning that crypto may not necessarily sink when stocks and bonds fall. But such thinking can be wishful thinking.

“Crypto has been massively procyclical so far,” Tasca said, and he doesn't expect 2024 to be any different.

“Academic literature does not support the idea that BTC is a safe haven: if stocks go down and monetary or fiscal policy becomes more restrictive, I expect crypto to go down as well.”

Lucas Kiely, chief investment officer of the digital wealth creation app, said: “Crypto joins TradFi's assets in a steep decline when the sell-off occurs. But BTC may recover quickly due to its ‘flight to quality' nature relative to other crypto assets.

“Cryptocurrencies are not completely free or counter-cyclical with the rest of the risk category,” said Mark Fleury, CEO and founder of Two Prime – a financial technology company that focuses on crypto financial applications. “But it proved last cycle that it can sometimes act as a safe haven,” he told Real Economy magazine.

When Silicon Valley Bank collapsed in March 2023 – the second largest bank failure in US history – global stock markets were rocked. But BTC “rallied” against some expectations, Fleury said.

More Americans own crypto than their own dogs.

The 11 new position Bitcoin ETFs approved by the SEC in January have proven popular with investors in the first half of 2024. BlackRock's iShares Bitcoin Trust ETF alone had amassed $20 billion in assets by mid-June, making it one of the most impressive ETF startups ever. .

Adoption continues apace, and crypto's broader user base could provide a bulwark if and when the traditional financial world begins to shake, some believe.

“In the near future, cryptocurrencies are related to the gyrations of all risk assets, but as adoption continues to grow – more Americans now have crypto assets than their own dogs – they should protect holders more easily in a global stock market crash,” said Paul Giordano. , vice president of digital asset management at Marathon Digital, one of the largest Bitcoin mining companies in the world, says the magazine.

Green is also positive about crypto's ability to withstand global ups and downs: “If TradFi falters, investors may view crypto as a hedge against traditional financial instability, which could lead to continued investment and higher prices.”

What if the internet goes down?

Perhaps a more important question is whether Bitcoin and other cryptocurrencies can survive the ongoing TradFi crisis, which could be as geopolitically disruptive as war.

Cryptocurrencies require trading over the Internet, which in turn requires electricity and telecom providers. If geopolitical tensions worsen and “bad actors” engage in cyber or physical attacks on critical infrastructure such as power stations and data centers, won't cryptocurrencies also be in the dark?

“Bitcoin sits on one of the most vulnerable systems,” said Reza Bandi, CEO of Atlas Capital Group. As geopolitical tensions loom, he anticipates “asymmetrical” attacks on power networks, among other infrastructure.

“An army does not march across borders. Instead, the banking sector and electricity suppliers will be attacked. Access to crypto can be lost in large parts of the world.

If TradFi's collapse happens in 2024, for whatever reason, historian and author Higgins doesn't think bitcoin will provide much help to holders, though he admits he doesn't follow cryptocurrencies closely.

“In my opinion, cryptocurrencies are little more than speculative wealth that will eventually run their course. The closest historical parallel in American history is the proliferation of government-issued bank notes from the wildcat banking years of the mid-1830s after the passage of national banking laws to the mid-1860s.

During this period, the value of the dollar varied greatly depending on the underlying strength of the state bank issuing the silver note, Higgins continued.

“Cryptocurrencies, in my opinion, are not much different. Unless this trend is truly unique – and there is nothing in financial history to suggest that it is – it will run its course.”

More use cases are needed.

Others think the crypto industry needs to develop more compelling use cases if it is to survive the extended TradFi crisis and beyond.

“Crypto adoption has nothing to do with financial issues, but with developing real practical use cases, which has been rare so far,” says Tasca. “Long-term growth is not affected by short-term speculative trends.”

The crypto industry may need to really think about how it fits into the world of TradFi. “Self-sovereignty” is a crypto scam, Bundy asserts. If the global economy crashes, crypto won't save you.

It suggests that it may be part of the solution to a safer, more just world, but not “the solution.”

The industry could help itself by focusing more on real-world assets, ie, cryptocurrencies backed by assets from the physical world, like real estate and commodities, or traditional financial assets like Treasury bonds, Bundy says.

Predicting the unpredictable?

Of course, trying to predict economic crises and shocks can be a fool's errand, Higgins says. Economist and Nobel laureate Paul Samuelson once joked that the stock market “predicted nine out of the last five recessions.”

The fact that prophecies are ahead of actual events is a source of some excitement, Green admits. But that doesn't mean one should avoid them-

“Although speculative, these forecasts can still be useful for risk management. They prompt investors to optimize their portfolios and consider strategies to protect against potential downsides.”

The reality is that many, if not all, experts do not expect a global financial collapse any time soon.

“I see no reason to expect a global financial crisis,” David Irmak, a professor of finance and business transformation at New York University, told the magazine. “The economy is strong, and markets are at an all-time high. Much of the world's financial crisis is confined to China.

In any case, “it's hard to establish any correlation between crypto prices and the global economy,” Yermak says, “and there's little theoretical reason to maintain one.” Any prediction about crypto prices should probably be independent of global market conditions.

“We are in a very strong position in the real estate market, and bank balance sheets are more stable,” Elvira Sojili, associate professor of finance at UNSW Business School, told the magazine. “I don't think a global financial crisis is looming. Politics can lead us into crisis.

Still, others believe that key features of crypto and blockchain, including decentralization, security, transparency, and traceability, should ensure its survival in the event of a disaster.

“While the TradFi crisis may temporarily derail the crypto bull run, the underlying strengths and unique value propositions of blockchain and crypto technologies may lead to a stronger and stronger adoption trend in the long term,” Xiong says.

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Andrew Singer

Andrew Singer has been a regular contributor to Cointelegraph since October 2019. He has been a professional business writer and editor for more than 30 years, including 25 years as the founder and editor-in-chief of Ethics: The Journal of Practical Business Ethics, which he still publishes. In the year In 2017, he earned a master's degree in statistics from Columbia University – which sparked his interest in AI, machine learning, and blockchain technology. He currently lives in Peekskill, New York and enjoys hiking in the Hudson Highlands.