How Economic Downturns Could Hit Cryptocurrencies Hard

The US economy is on the doorstep of a recession. Certain economic indicators have shown clear signs of the possibility of the occurrence of such a recession. Fear has greatly impacted the investor landscape. Some investors have switched to safer assets, and many are preparing to make such a move in the near future. Cryptocurrencies, known as risky assets, have a high chance of suffering. Let’s break it down. Why should the crypto industry worry? 

Sahm Rule Indicator: Recession Signals are Rising 

The Real-time Sahm Rule Recession Indicator is a prominent indicator, which can give a clear signal about the start of a recession. In April 2023, the value was on the baseline, at 0.00. Since then, it has been consistently rising. In January 2024, it climbed to 0.20. By June, it reached 0.43. In August, it touched the yearly peak of 0.57. It is believed that the signal was triggered by the July Jobs report. 

Yield Data Analysis: The Curve is Inverted 

While analysing the 10-Year Treasury Constant Maturity Minuts 2-Year Treasury Constant Maturity chart, we can see an inverted curve. It first slipped below the baseline in July, 2022. For the last two years, the value has struggled to rise above the base level. Now, the value stands at 0.02 – slightly above the baseline, but considering the fact that on April 5, 2021, it was as high as 1.56, which we see now is not very impressive. An inverted yield curve happens when long-term interest rates fall below short-term ones. 

Stock Market Volatility Affects Bitcoin 

There is evidence to suggest that stock market volatility can affect cryptocurrencies. The VIX Index – an indicator used to measure market volatility –  has risen to levels we saw during the COVID-19 Crisis and the 2008 financial crash. If stocks suffer a major hit, there are high chance that cryptos could feel its negative impact.

What Does This Mean for Crypto?

It is important to understand how investors will respond once the proposed interest rate cuts are implemented by the Federal Reserve. If it reverses the present trend and removes fear among investors, it will create a tremendous positive impact on the crypto landscape.

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