Economic Indicators Flag Recession Worries. How It May Affect Bitcoin

Recently U.S. treasury yield curve inverted to flag a possible future economic recession. Economists are getting nervous due to inverted yield curve historical correlation which accurately indicated the previous 7 recession cycles.

The cause of this can often be attributed to a weak economy which causes inflation to drop below the healthy zone i.e. 2% as seen by the U.S. Federal Reserve for the economy to thrive. The annual inflation rate for the United States is 1.6% as of June 2019.

What is an Inverted Yield Curve?
An inverted yield curve occurs when long-term treasury bonds have a lower yield than short-term treasury bonds. Inflation can be the cause attributed to why short-term rates move so rapidly.

What are treasury bonds?
Backed by full faith and credit of the U.S. government, treasuries are considered to be a low-risk investment. Investors that purchase these Treasuries loan the government money. The government, in turn, makes interest payments to these bondholders as compensation for the loan provided.

Historically, inverted yield curves have accurately forecasted U.S. recessions. Hence, this type of yield curve is considered to be a valuable indicator of future economic recession, however, it can take years to playout.

A recent example is when the U.S. Treasury yield curve inverted in late 2005, 2006, and again in 2007 before U.S. equity markets collapsed. The curve also inverted in late 2018 and now in Aug 2019. 

How it may impact Bitcoin price and other cryptocurrencies:

In the beginning: 
When this occurs, investors tend to turn to safe options, such as defensive stock like food, oil, etc. or safe-havens like gold, which are often less affected by downturns in the economy. Unlikely for investors to bet big during this time on volatile assets.

Post rate cuts (expected in Sept 2019):
The U.S. Fed may react with more rate cuts to correct the course. Lower interest rates will stimulate economic growth, as lower financing costs can encourage borrowing. 

As a result of lower borrowing costs, institutions will be investing more in newer technology and blockchain projects may be an attractive place. DeFi projects (lending) and Crypto exchanges (margin trading) may have an edge over other blockchain products or services.

Aftermaths of steep rate cuts:
Worth mentioning, when rates are too low, it could spur excessive growth and subsequent inflation. As its purchasing power erodes due to rising inflation, the value of the dollar declines with each increase in the price of basic goods and services.

Therefore during economic turmoil, Investors (Bitcoin maximalist) may be more than likely to bet on Bitcoin price rather holding USD. Current US Inflation Rates: 2009-2019

Traditionally during this time, investors are more than likely to invest in safe assets.

It remains to be seen if the market defines Bitcoin as safe-haven in the periods of these economic worries.