Macroeconomic data points to intensifying pain for cryptocurrency investors in 2023

Without a doubt, 2022 was one of the worst years for Bitcoin (BTC) buyers, primarily because the price of the asset fell by 65%. While there were some obvious reasons for the drop, such as the LUNA-UST accident in May and the FTX explosion in November, the most important reason was the policy of the US Federal Reserve to cut and raise interest rates.

Bitcoin’s price has fallen 50% from its pre-LUNA-UST crisis peak to $33,100 thanks to the Fed’s rate hike. The first significant decline in Bitcoin’s price was due to growing market uncertainty around rumors of a potential interest rate hike in November 2021. By January 2022, the stock market had already begun to show cracks due to the mounting pressure of the expected decline, which had a negative impact on cryptocurrency prices.

BTC/USD daily price chart. Source: TradingView

Fast-forward to the year and the cryptocurrency market continues to face the same problem, where headwinds from the Fed’s rate hike are limiting significant upside moves. What’s worse is that this regime may last longer than market participants expect.

The clues come from the dot-com bubble of the 1990s

The dot-com bubble of 1999-2000 can teach investors a lot about the current crypto winter, and it continues to paint a grim picture for 2023.

The tech-heavy Nasdaq Composite inflated to enormous levels in the early 2000s, and that bubble burst when the Fed began raising interest rates in 1999 and 2000. As credit became more expensive, the amount of easy money in the market decreased, sending the Nasdaq down. down 77% from its peak.

Nasdaq composite index chart. Source: Macrotrends

The cryptocurrency market is currently facing the same scenario.

Fed Chairman Jerome Powell is trying to contain inflation, which means higher rates are ahead for some time. Neel Kashkari, president of the Minneapolis Federal Reserve, wrote in a recent blog post that he expects terminal rates to rise to 5.4% by June 2023 — from rates currently at 4.25% to 4.50%.

Note that during the dot-com bubble, the Fed stopped raising interest rates in May 2000, but the decline in the Nasdaq continued for the next two years. So we can expect the cryptocurrency market to fall further, at least until the Fed turns. If the US economy experiences a recession similar to that of 2001, there is a risk that the current bear market will be prolonged.

Growing signs of recession

According to a report by Mises Institute analyst Ryan McMaken, the US dollar’s M2 money supply will turn negative in November 2022 for the first time in 28 years. This is an indication of a potential recession and is usually “associated with slowing growth rates of the money supply.”

While McMaken acknowledged the possibility that negative money supply growth could be a false signal, he added that it is “a red flag for economic growth and employment in general. It’s also yet another indication that the soft easing promised by the Federal Reserve may never materialize.

A potential recession indicator using the US dollar’s M2 money supply. Source: Mises Institute

The latest report from the Institute for Supply Management also shows that economic activity in the United States contracted in December for the second month in a row. The purchasing manager’s index (PMI) came in at 48.3% for December, and values ​​below 50% mean contraction. It shows that the demand for manufactured goods has decreased, probably due to the effect of high interest rates.

Since 1857, the average U.S. recession has lasted 17 months, and since 1980, six recessions have lasted less than ten months. This recession technically started in August 2022 with two-quarters of negative GDP growth. Historical averages suggest that the current recession could last from June 2023 to January 2024.

Can favorable conditions emerge sooner than 2024?

The cryptocurrency market needs an easy money space to fall back on to build a sustained bull run. However, under the Fed’s current plan, those conditions seem far off in the future.

Only a black swan event, forcing the US government to resort to quantitative easing with low interest rates and economic stimulus like it did during the COVID-19 pandemic, could ignite another bull run.

According to independent market analyst Ben Lilley, a bubble could be forming in the consumer credit sector, which has grown exponentially over the past decade to nearly $1 trillion.

The increase has been particularly sharp in the past two years, after the US government stopped writing stimulus checks. Lilly believes the sector could collapse if many borrowers default on their loans due to growing economic stress. He also noted that “government incentives are needed to solve this.”

The timeline for a bubble burst is one of the hardest things to predict. Perhaps this could coincide with the end of the recession in late 2023 or late 2024. Still, pending a Fed rotation or confirmation of quantitative easing, most investors expect cryptocurrency markets to remain in a bearish trend.

To date, the total capitalization of the cryptocurrency market has declined by 75% from its peak of $3 trillion. The $750 billion peak in 2017 is an important support and resistance level for the market. If this level is breached, the industry’s total market capitalization could fall below $500 billion.

Total cryptocurrency market capitalization chart. Source: TradingView

While there may be temporary bear market rallies, macroeconomic pressures will undermine any positive action.