The Federal Reserve’s efforts to protect the value of the U.S. dollar is becoming a very difficult balancing act as BRICS countries look for alternatives to the current dollar-centric world.
The Fed’s outlook is questionable, especially with Trump’s policies remaining largely undefined. Many analysts believe that the market might be staring down the barrel of a severe downturn, akin to the one experienced in 2008.
Business cycle theorists would argue that those dips are an integral aspect of an economy’s cyclical nature. In December 2024, the DJIA suffered its first ten day losing streak since 1974 because of numerous factors, including pessimism regarding the rate cuts outlook for the rest of the year.
Nevertheless, against this headwind, the stock markets continue to take advantage of unrestrained bull runs, reaching new all-time highs on 57 occasions in 2024 alone. Moreover, there has not been any significant protracted downturn since the 2008 global financial crisis, and markets have surged after the COVID-19 plunge in March 2020.
The Mother of All Bubbles
While stocks may perform best in the future, it’s critical to remember that not everything is painted in gold. With all the bullish sentiments in the market, it feels like the mother of all bubbles is ready to burst. A lot of people have faith in the market right now which is why there is so much optimism, but infamously, the data proves otherwise.
If the Federal Reserve Elects to add liquidity into the market and reduce interest rates, the stock market may avoid this catastrophic collapse. Quantitative easing has not graced the Bitcoin era yet and how Bitcoin performs under such conditions is bound to be unknown.
Yet inflation continues to increase and interest rates are still unhealthy, which has made ordinary investors place their money into the stock markets. On the other hand, the United States government’s debt keeps increasing, edging the government closer towards adopting extraordinary measures to control the debt.
Due to increasing debt, the Fed might consider increasing the interest rates, and the government may have to impose some austerity measures. Additionally, China may try to boost internal consumption to draw in more foreign direct investment. All these unanswered impulses put global economies in danger.
As of 2024, US stock markets have performed better than the rest of the world and so did the US technology stock due to additional spending directly from the government. Nevertheless, this performance will not be consistent over an extended period of time, and at some point, the overachieving performance is bound to cease.
Bitcoin in a Market Crash
The most beneficial analogy would be the one concerning the stock market crash associated with the COVID-19 pandemic which started in February and lasted through March of the same year.
While the recession worsened, the Dow Jones dropped with the highest point value in the inflation cut that had taken place after the 1987 Black Monday crash, even with the Federal Reserve spending an estimated one point five trillion dollars in the money markets.
Nonetheless, the stock market increased in value rather fast during the year 2020, differing greatly from the projected timeline for subsequent downturns in the markets – this period is expected to bear more features of the economic recession of 2008.
Another important note is that during the 2020 market crash, Bitcoin surprisingly trumped gold as one of the fastest assets to recover. Bitcoin was priced at $10,300 before plummeting to $5,002.58 in mid March. However, following this dip, Bitcoin returned back to $11,000 by the end of July.
If an event this drastic occurs now, Bitcoin would likely show the greatest drops, but would recover faster than most other risky assets due to it’s unique, inelastic characteristic.
Following it’s prior price history, this decline is expected to be tremendously volatile – potentially dropping below $50,000 – before rising back up to $500,000 or potentially $1,000,000. Bitcoin is predominantly viewed as “digital gold”, so if this idea persists, it’s price will eventually skyrocket exponentially.
