The link between unemployment and the price of Bitcoin

As Bitcoin navigates its first recession in the USA, it becomes very interesting to see The link between unemployment and the price of Bitcoin. This might just be one piece of analysis that investors should monitor closely.

Recession

Following the last major recession in 2008, Bitcoin was launched. Many believe that it was launched as a reaction to the government bailing out the banks. Ultimately, it was the taxpayers who ended up paying for it. But since then, Bitcoin has not gone through a recession (except for the flash crash due to COVID), and no one really knows what impact it could have on its price.

Since its recent cycle peak, the price of Bitcoin has, at the time of this post, has gone down by about 72%.  This is not abnormal during a ‘Crypto Winter’ (Crypto Bear Market). During previous ‘Crypto Winters’ the price of Bitcoin went down by 80% or even 90%. It does seem though that with each cycle, the drawdowns are less extreme (see the below graph).

This could indicate that the overall volatility of Bitcoin is progressively diminishing. But what is different this time is that the USA and many other major economies are entering or are in a recession. The S&P 500 is down by -25% and tech stocks ETFs are down about -33% and we might not have reached the bottom just yet.

The FED

It is pretty clear that this recession is caused by the FED (US Central Bank) hiking interest rates. In the USA, the FED has two mandates: Managing Inflation and Employment. During the COVID pandemic, the USA printed more USD than ever in its entire history to try and keep Americans employed (among other things). This has resulted in inflation that the USA has not seen since the 80’s.

Inflation in the USA is currently at 8.2% and core inflation is at 6.6%. To try and mitigate this, the FED has raised interest rates from 0.25% to 3.25% in less than 6 months, which is unprecedented. This naturally destroys demand, as borrowing money (for a mortgage for example), becomes more expensive.  The consequence of this is that risk on assets such as stocks or cryptocurrencies loses in value. A lot of value!

The current chairman of the Fed, Jerome Powell, has explicitly said that he would continue to push interest rates until inflation in the USA is back to ‘normal.’ Normal is between 2% and 3%. So where does unemployment fit in ? Well, since unemployment is the second mandate of the FED along with inflation, they continue to increase interest rates as long as unemployment remains low.  It is currently quite low at 3.5% (see the below graph).

This means the FED has room to further increase interest rates in an effort to tame inflation. This also means that there will be further pressure on risk-on assets, such as stocks or cryptocurrencies, until either inflation is stabilized at acceptable levels or unemployment starts to spike, and the FED has no choice but to stop interest hikes. It would therefore be prudent to keep an eye on both inflation and unemployment rates in the USA for the time being.

Bitcoin resistance

On a more positive note, Bitcoin seems to have found a strong resistance at about $19,000 in June 2022. While stocks have continued to make lowers lows since then. Could this be the first sign of decoupling between the stock markets and cryptos? More on that in a future blog post.

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