Why is crypto bouncing back?

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Blue-chip crypto assets, including bitcoin (BTC) and ether (ETH), have had a very strong 2023 so far, with BTC up around 36% since New Years and ETH in increase of almost 30%. There is growing evidence that the bottom has been reached for crypto markets, and some macro data suggests this year will be much brighter for the sector than the accumulation of 50 scams and disasters. cars in 2022.

This is probably the most compelling argument for the crypto bottom: that bad actors and the consequences of their leverage games that spread contagion have been eliminated. Certainly on an emotional level, getting rid of Alex Mashinsky, Do Kwon, Three Arrows Capital and Sam Bankman-Fried is an opportunity for a fresh start.

This article is excerpted from The Node, CoinDesk’s daily roundup of the most crucial stories in blockchain and crypto news. You can sign up to receive the full newsletter here.

This new beginning, above all, is starting from a stronger base thanks to the wave of education and enthusiasm generated by the COVID-19 pandemic, despite the wave of fraud that ended the last bull. Bitcoin reached a local low of just under $16,000 on November 9, 2022, which, despite the huge decline from late 2021 highs, was still up 66% from the prices of September 2020.

See also: David Z. Morris Time to decide: are you an investor or a gambler?

This is a lesson worth learning. Crypto-assets continued their decade-plus trend of steady, albeit volatile, growth. While there are significant regulatory risks on the table this year, this basic trend appears to be continuing, minus the peak of 2021 mania and the leverage-hungry scammers that dragged it into oblivion.

Americas soft landing (maybe?)

Yet, while getting rid of the scammers should mean we’ve eliminated some major downside risks, that’s hardly grounds for a new crypto bull market. Instead, what will matter most over the next year are macroeconomic conditions, particularly the impact of inflation and interest rates on crypto and other risky assets. (While good to get into, this dynamic itself can be a primary route to disappointment.)

The story continues

The inflation picture is complex around the world, but the current rally in BTC and ETH seems to reflect a growing sense that America is specifically on the path to not only whipping inflation, but perhaps- even be a soft landing that stops inflation without crushing jobs.

Observers of 2022 seemed to have completely abandoned the thesis of transitory inflation that President Jerome Powell and the Federal Reserve tried to resell in 2021. But it can be said that, in retrospect, inflation turned out to be quite transitory, driven at least as much by supply chain and commodity disruptions as by basic money supply. US inflation has now fallen for six straight months.

The month-over-month figures for December are particularly upbeat, with the consumer price index (CPI) actually falling 0.1% on the month. Some household necessities are even below the Fed’s 2% inflation target, with food prices rising just 0.2% month-over-month and prices for gasoline down 9.4% over the month. It’s not enough to wipe out the high inflation over the past year and more, but it brings us closer to a new stable base.

This has led to widespread expectations that the Fed will ease its interest rate hike program. The four consecutive 0.75% rate hikes in 2022 have been historically aggressive, but the market has now fully priced in expectations of a slight 0.25% hike in February, with the possibility of no hike at all. during the second half of the year.

It may seem surprising that any upside is on the table given that we now have month-over-month deflation, but in fact it highlights another positive data point. The Fed still needs to maintain some pressure simply because the jobs numbers are still strong, with the latest report maintaining a historic low unemployment rate at 3.5%, but also some slowing in wage growth.

It’s almost Goldilocks caliber fair in macroeconomic terms, presenting the real possibility of a fabled soft landing that brings inflation under control without catastrophically shutting down the economy and throwing workers out of the way. In turn, this is great news for risky speculative assets like crypto.

Euro-Chinese confusion

The situation in Europe is more complicated, as former CoinDesker Noelle Acheson examines in the latest edition of her newsletter, Crypto is Macro Now. European manufacturing and services indices for January beat expectations, suggesting the first return to positive economic growth in the zone since June.

But Europe may not be as likely to get a soft landing as the United States. The European Central Bank, apparently still concerned about inflation, signaled a continuation of more aggressive rate hikes in the coming months.

This is still a much better prospect than in the third major axis of global economic activity, China. The country continues to teeter on the brink of something darker than inflation, or even a simple recession. First, although COVID-19 infections have now dropped dramatically since the surprise end of the Zero-COVID lockdowns in December, more disruptive surges seem likely.

Worse still, China still faces an ongoing property crash that threatens the very foundations of its still-developing financial system. Following a crackdown on indebted and corrupt developers in 2020, house prices continued to fall in fact, the decline accelerated in December. That’s potentially catastrophic, as housing accounts for a disproportionate 45% of Chinese household wealth, compared to a more typical 25% in the United States, according to Federal Reserve data. This means that falling house prices are very, very bad for Chinese consumption.

The fate of China is not a particularly direct input to crypto markets, given the extensive anti-crypto crackdown still in place there. But its outsized impact on the global economy means it has big downstream implications. These impacts could include COVID disruptions so severe that they continue to disrupt Chinese manufacturing, possibly worsening inflation globally. On the other hand, a Chinese housing-driven recession could ease global price pressures, but also dampen global growth and economic enthusiasm.

The anti-speculative drive

After discussing interest rates and pricing pressures, I feel compelled to point out the inherent problem with this focus. Crypto investors are primarily worried about central bank interest rates and implicitly focused on speculative drivers of crypto price, including growing competition for dollars from safe investments like treasury bills.

But maybe it’s time to turn away from that mindset. One side of the 2020-2022 story in crypto is that the first pandemic saw legions of new entrants learn about crypto during the COVID lockdowns in 2020, which in turn created a speculative mania in 2021 which then burst in 2022.

See also: David Z. Morris There’s less money in crypto, and that’s a good thing

In a perfect world, we continued curiosity and real user adoption, without the fads or outbursts. These fads, with their expectations of outsized returns, tend to push speculators towards charismatic hype-men, with their exciting new tokens and promises of outsized returns. 2022 has been a sobering lesson in the extreme risk of following these animal spirits, just ask anyone holding LUNA or FTT this time last year.

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