by Adam Rosario, SFA Director of Cryptocurrency

July 17, 2022

CRYPTO MARKET - THE BIG PICTURE

Global Economic Update: Bitcoins First Recession

As things stand, the global economy is inching towards a recession given (1) negative GDP growth (2) declining retail sales and (3) lower manufacturing output. However, resilient employment rates and high inflation makes the current situation an interesting case study on an unusual form of recession. In general, recessions cause investors to migrate to safe-haven assets such as gold, bonds, US dollar etc. leading to a selloff in riskier assets such as emerging markets, equities and presumably cryptocurrencies.

I would argue that the Covid-19 induced meltdown in 2020 did not qualify as a typical recession due to prompt corrective action taken by global central banks and the subsequent pace of economic recovery. Hence, the crypto market lacks a history that would enable us to predict what happens to it in a recession. Enlighted investors remember that a bear market is the best time to buy stocks/tokens that will stand the test of time because they are available at prices well below their true intrinsic value. The trade-off, however, is that capital is locked up since these assets are not expected to rally until the recovery begins.

Market Movement of Major Cryptocurrencies (as on July 17th, 2022)

Has Crypto Bottomed out?

In short, no one can know where the bottom will be since it is cryptos first recession. Bitcoin has already lost 70% of its value from its peaks of $69k in November’21 to $20k in July’22 (see table above). Today, investors are struggling with the decision on whether to buy the dip or wait for a bigger fall. After all, bear markets usually offer the lowest asset prices, but the key is to choose assets that will come back when the market rallies.

A fact that we know for sure is that cryptocurrency has displayed a positive correlation with technology stocks; Bad news for crypto enthusiasts attempting to label Bitcoin "Digital Gold". The sharp correction therefore conclusively proves that Bitcoin lacks the safe-haven status conferred on gold.

In my view, the macro-economic developments are critical. We are in unprecedented times, and crypto is still a relatively new asset class. In fact, tokens getting affected by non-crypto macro factors suggests that the market is out of the euphoria phase and moving into maturity, with institutional investors finally getting comfortable allocating resources. Moreover, there is a growing consensus among experts that it is inevitable Bitcoin et al surpass their previous peaks and that the longer-term outlook for the space is encouraging. However, with 2,047 failed cryptocurrency projects out of 10,025 in existence (as of May’21), it is important to identify tokens with sound fundamentals, strong community, and capable leadership teams. Over the coming year, SFA endeavors to bring you the major developments, analysis, and recommendations for everything crypto.