"The bottom has not yet been reached." How the U.S. recession will affect the cryptocurrency market
Experts told how risky assets, including crypto-assets, will behave depending on the US Federal Reserve's monetary policy in the coming year
Cryptocurrencies could continue to fall in 2023 as part of the current market cycle, the authors of a report by analyst firm Nansen Research warned. They attributed it to a possible U.S. recession and a sell-off in the stock market if the Federal Reserve maintains its policy of raising interest rates.
According to the observation of analysts, the peak strengthening of the U.S. dollar has not yet been reached, and market conditions are not favorable to the growth of prices for risky assets, including stocks and cryptocurrencies. Cryptocurrencies themselves look neither "overpriced" nor "cheap" relative to the S&P 500 Index.
In the report, analysts use their own market indicators, including Crypto Risk Premium (CRP). The authors define the indicator as a measure of the excess return that investors need to compensate for ownership of crypto assets, and link its value to the fundamental value of these assets expected by investors.
In a scenario with a U.S. recession and a new wave of stock market sell-offs, this indicator is likely to spike for both stocks and cryptocurrencies, which could trigger a further decline in their rates. However, analysts concede that this could be the final stage of the fall in prices in the crypto market.
The final conclusion of the Nansen study is that the Fed is likely to tighten financial conditions. In addition to the consequences of the Fed's decisions, the cryptocurrency market is still experiencing a number of unforeseen events. The fall of the Terra ecosystem in May and the recent collapse of the FTX exchange triggered an intensified bearish period in the crypto market.
"There are no visible factors that could turn the market around. Exchanges first need to regain the trust of investors who have lost billions due to fraudsters, and only then look for fundamental reasons for the growth of the cryptocurrency market," - commented the situation financial analyst at BitRiver Vladislav Antonov.
The tightening of monetary policy by the U.S. Federal Reserve caused the markets to collapse. The rapid rise in interest rates hit the U.S. economy, as the fight against inflation dragged on. The correlation between bitcoin and the S&P 500 Index through Nov. 7, 2022, was 0.82 in 90 trading days and 0.75 in 30 trading days. Antonov observes that since the collapse of the FTX exchange, there has been a rascorrelation in the price of bitcoin and the stock index amid a flight of investors from cryptocurrencies.
"If the stock market turns down, bitcoin will continue to update lows. Without risk appetite from investors, it will not rise," the analyst predicts, adding that technical analysis still points to the persistence of a bearish trend with targets in the $10,000-$12,000 zone.
Recession in the U.S. economy has actually already happened this year, said the head of the analytical department of AMarkets. During two quarters in a row, the U.S. GDP showed a decline, which is considered a technical recession (minus 0.3% in the first quarter and minus 0.9% in the second quarter). The U.S. economy showed 2.9% growth in the third quarter, which was the result of capital inflows from Europe amid the energy crisis.
According to experts, now in general neither economists nor investors, as well as the IMF and the Fed, have little doubt that the U.S. economy may enter recession in 2023. The reason for that will be the Fed's rate hikes to combat decades of record inflation, which will sooner or later lead to a slowdown in consumer demand and economic processes in the country.
"Against such a backdrop, the U.S. stock market is also expected to fall. The bottom of the indices has not been reached yet. Of course, against such a background, investors will increasingly walk away from risk, getting rid primarily of cryptocurrencies," predicts the representative of AMarkets.
This process has clearly manifested itself this year. The rate of bitcoin has fallen by more than 60% since the beginning of the year and updated the two-year minimum. In addition, the outflow of investors' money from cryptocurrencies contributed to the bankruptcy of the FTX exchange. The collapse of one of the largest cryptocurrency exchanges can still provoke a "domino effect" when other platforms will have liquidity problems.
An example of such an analyst considers Binance, from purses of which investors during the week from December 13 to 20 withdrew $ 6 billion. And the U.S. financial authorities intend to strictly regulate the cryptocurrency market, which are preparing new legislative initiatives, the expert adds.
According to the expert, expectations of a global crisis, the mass withdrawal of investors' funds from the cryptocurrency platforms, the loss of confidence in exchanges and the strengthening of state regulation of the digital assets sector do not give much chance for the growth of the crypto market in the foreseeable future. We should expect that in the coming year there can be registered a further decline in bitcoin value up to $10 thousand and decline in the prices of other cryptocurrencies.