It is no surprise that deteriorating macro-factors have been the cause of the current crypto bear market. However, Coinbase confirmed this notion in a blog post on July 5, saying that the other third was due to a weak outlook for the cryptocurrency.
Coinbase reported that the relationship between crypto and traditional markets has grown exponentially since 2020. It was also the year that pandemic-induced lockdowns were implemented across the world.
“Thus, the market expects crypto assets to become more and more intertwined with the rest of the financial system.”
It added that the crypto asset risk profile is similar to that of commodities such as oil and tech stocks.
More macro pain ahead
The crypto market is currently down about 70% from its all-time high in November. This is nothing new for a bear market that has seen declines of over 80% in the past.
However, the major difference with this cycle is that it has been influenced by macroeconomic factors and may be the first such cycle when the US is in recession.
A recession is determined by two consecutive quarters of negative GDP (Gross Domestic Product) – the monetary value of all finished goods and services produced within a country’s borders.
In Q1, US GDP stood at -1.6%, the Q2 figure will be released by the Bureau of Economic Analysis (BEA) on July 28, and is not expected to improve. A recession is bad news for crypto markets, as is galloping inflation.
The June inflation rate, or consumer price index (CPI) will be released by the US Bureau of Labor Statistics on July 13, and is predicted to be at 8.7%, worse than May’s 8.6%. This squeezes spending and investments, especially for high-risk assets such as crypto.
Rising rates and recession
Additionally, the Fed is expected to raise rates again later this month which also discourages lending and borrowing and encourages savings along the traditional finance avenue. Those in debt will have to pay more, putting further pressure on the funds available for investment.
Coinbase notes that the current situation is similar to what happened during the 2000-2001 dot-com recession. The S&P 500 lost 29%, but the riskier Nasdaq Composite Index, which is composed primarily of tech stocks, tumbled 70% from peak to trough.
Hence, there could be dark clouds ahead for the crypto markets, which are unlikely to clear until the macroeconomic factors return to relatively normal levels.
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