Major crypto assets such as Bitcoin (BTC) and Ethereum (ETH) are off to a very auspicious start to 2023 so far. Bitcoin is up about 36% year-to-date, while Ethereum is up about 30%.
There are more and more reasons to believe that the cryptocurrency market has “bottomed out.” Macroeconomic data also points to a much brighter year than 2022’s spate of frauds and catastrophes.
This is perhaps the most compelling evidence that cryptocurrencies have bottomed out. The bad guys and the influence of leveraged investments that propagate their influence are already out.
On a psychological level, certainly Alex Mashinsky and Do Kwon, Three Arrows Capital and Sam Bankman-Fried. His exit feels like an opportunity for a new beginning.
A new beginning is coming from a stronger baseline, thanks to the education and enthusiasm that the COVID-19 pandemic has fueled. On November 9, 2022, Bitcoin hit a bottom of $16,000 (approximately ¥2 million) for the time being, but although it has dropped significantly from its high in the second half of 2021, it is more than 60% higher than September 2020. It was expensive.
This is an important lesson. Crypto assets have been growing consistently, albeit with high volatility, for over a decade. Key regulatory risks have been debated this year, but barring a bubble-like rally in 2021 and leverage-hungry scammers, the underlying trend seems to be continuing.
America’s soft landing
But while banishing the scammers means wiping out a major downside risk, it doesn’t set the stage for a new bull market. The most important thing in the next year is the macroeconomic situation. Especially the impact of inflation and rate hikes on crypto and other risk assets.
The inflation picture is complex globally, but the current rally in Bitcoin and Ethereum suggests that the United States will not only keep inflation under control, but will also have a “soft landing” that will stop inflation without taking a huge hit to jobs. This probably reflects the heightened expectations of the future.
In 2022, pundits appeared to have completely abandoned the “temporary inflation” claim that Powell’s Federal Reserve (Fed) made in 2021. In retrospect, however, the inflation appears to have been fairly temporary. Inflation in the US has fallen for the sixth month in a row.
Dec 2022 m/m figures are particularly positive, with the Consumer Price Index (CPI) down 0.1% m/m. Some commodities were even below the Fed’s 2% inflation target, and food prices rose just 0.2% month-on-month. Gasoline prices fell 9.4% from the previous month. While not enough to offset the past year-plus of inflation, it is certainly establishing a new stable baseline.
Thus, there was widespread hope that the Fed would slow its pace of rate hikes. A fourth consecutive 0.75% hike in 2022 has been historically quite aggressive, but the market is now fully priced in for February’s 0.25% rate hike, and the It is possible that there will be no rate hikes at all.
While it may come as a surprise that interest rates are being discussed in the current month-on-month deflation, it also underscores another piece of positive data. Employment data remain strong, with the unemployment rate remaining at a historically low 3.5%, according to the latest report, but wages rising slightly slower, so the Fed will need to maintain some pressure.
This is exactly the kind of situation where the legendary “soft landing” that keeps inflation under control without causing a catastrophic slowdown in the economy and mass unemployment is a real possibility. This is also good news for risky assets such as cryptocurrencies.
Confusion between Europe and China
The situation in Europe is more complicated. Europe’s January manufacturing and services data beat expectations, marking the first return to positive economic growth since June.
But Europe is not as likely to have a soft landing as the US. The European Central Bank (ECB) still appears concerned about inflation and has signaled a continuation of more aggressive interest rate hikes going forward.
But even this is a much better prospect than China, the third hub of the global economy. China continues to loom on the brink of inflation, even more bleak than recession.
First, the number of coronavirus cases has dropped dramatically since the end of the “zero-corona policy” in December, but a more frightening surge could occur. Moreover, China is facing a housing market crash that threatens the foundations of its still developing financial system.
House prices continued to stagnate following the 2020 crackdown on debt-laden and corrupt developers, with the decline accelerating in December. In China, housing accounts for 45% of household wealth, well above the 25% in the United States, according to the Fed. In other words, a fall in housing prices would be extremely negative for Chinese consumption.
Given the widespread anti-crypto policies still in place, China’s future will not directly affect the crypto market. But since China has a major influence on the global economy, the attendant impact will be significant.
The disruption caused by the new coronavirus is so severe that it may continue to hit China’s manufacturing sector and exacerbate global inflation. On the other hand, a recession in China triggered by low housing prices may ease global price pressures. But it could also dampen global growth and economic enthusiasm.
fight the speculative urge
Now that we’ve touched on interest rates and price pressures, we should also point out the underlying problems. Crypto investors, primarily concerned about central bank rate hikes, implicitly focus on the speculative factors in crypto prices compared to safer investments such as government bonds.
But maybe it’s time to distance yourself from that way of thinking. One of the 2020-2022 crypto stories is that the mass of new entrants who learned about crypto during the 2020 lockdown will spark a speculative boom in 2021 and a bubble burst in 2022. It is said that
In a perfect world, curiosity would have continued and pervasiveness would have continued without frenzy or crash. The frenzy with the promise of huge returns tends to attract speculators to exciting new tokens and charismatic figures who promise huge returns.
2022 has been a year of lessons, a cold display of the enormous risks of following such animal instincts. Just ask anyone who owned a Terra (LUNA) or FTT around this time last year.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: Fed Chair Powell (Helene Braun/CoinDesk)
｜Original: Why Is Crypto Bouncing Back?