Bitcoin has long been touted as a safe haven asset or a hedge against economic and political uncertainty. However, its hedging properties could soon be put to the test as the U.S. Treasury market goes through a process called “bull steepening,” which has historically been followed by economic recessions.
The U.S. Treasury yield curve, which shows the yields of different government bond maturities, is normally upward-sloping. However, in mid-2022, the curve inverted, with the two-year yield surpassing the 10-year yield. This inversion is often seen as a warning sign of an impending recession. Since then, the yield curve has been normalizing, with the spread between the 10- and two-year yields slowly recovering.
In recent months, the normalization process has accelerated, primarily due to bull steepening, where the two-year yield falls more than the ten-year yield. This suggests a potential recession on the horizon. Historically, bull steepeners have been followed by recessions, further highlighting the possibility of economic weakness ahead.
During recessions, there is typically a decline in consumer and business confidence, leading to decreased demand for assets like bitcoin and technology stocks. However, if the Federal Reserve implements monetary easing measures to counter the recession and stem the decline of the dollar index, it could ultimately be bullish for bitcoin, as was seen during the 2020 coronavirus-induced recession.
Despite bitcoin’s safe haven appeal and potential benefits during a recession, its performance will ultimately depend on various factors such as investor sentiment, market conditions, and the effectiveness of government and central bank measures in stabilizing the economy.