Cryptos Macro Drivers It’s Not Just About Bitcoin

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This week, unsurprisingly, we saw another 25 basis point (bp) hike in the fed funds rate. The increase itself is not such a big noise floor, if you will. Were all used to it by now. What’s remarkable about this one is that there’s a good chance it will be the last. This is a very big problem for the entire crypto market, not just bitcoin (BTC).

Below I explain why I believe this week will be the last interest rate hike in the US, why this is good news for bitcoin, and why the tailwind is spreading to others as well. crypto assets.

Noelle Acheson is the former Head of Research at CoinDesk and Genesis Trading. This article is excerpted from his Crypto Is Macro Now newsletter, which focuses on the overlap between the changing landscapes of crypto and macro. These opinions are her own and nothing she writes should be considered investment advice.

Last week, preliminary US GDP came in at 1.1% quarter-on-quarter growth, well below the 2.0% expected, and still below the 2.6% fourth-quarter downward revision. Much of the disappointment was due to weak inventory build, with defense and consumer spending accounting for most of the weak growth. Adjusted for inflation, consumer spending jumped 3.7% in the first quarter, much more than the 1.0% rise in previous quarters. Keep in mind that this increase follows one of the most pronounced rate hike campaigns of all time.

This is unfortunately reflected in the inflation data. The Federal Reserve’s preferred inflation index for personal consumption expenditures (PCE) excluding food and energy (known as core PCE) for the first quarter rose 4.9%, more than the estimate consensus of 4.7% and than the fourth quarter of 4.4%. The more granular core PCE reading for March, released on Friday, did not show a surprising increase, but it also did not decline, touching a steady 0.3%, or 4.6% on a annual basis. Again, frustrating resilience after nearly five percentage points of interest rate hikes in 12 months.

So, because higher interest rates don’t seem to be working, does that mean the Fed will have to raise them even more? Not necessarily. As the Fed has often reminded us, data moves with long and variable lags, with no indication of what long means. There are signs that the acceleration in underlying prices seen in the first quarter is running out of steam. In addition to the March figure, we have the Cleveland Feds Inflation Nowcast, which models April’s core PCE at just over 4.6%. This could encourage the Fed to choose to wait and see if more of an impact begins to be felt, which it is likely to do.

For the moment, this probability is not obvious. On Friday, we saw the employment cost index for the first quarter registering a slight increase of 1.2% quarter on quarter. It is the Fed’s preferred employment cost indicator because it takes into account benefits as well as wages and is therefore not skewed by job changes between occupations or industries. . The rise was only 0.1 percentage point, but that it was there is concerning, and the year-over-year increase was 4.8%, well above the rate of target inflation of 2%.

But there are signs that the job market is cooling. On Thursdays, U.S. jobless claims continued at the increase seen in early April, with the most recent four readings up more than 6% from the previous four. The wave of layoffs depressing our headlines suggests that this figure should continue to rise.

Also, one thing that jumps out when looking at graphs of the unemployment rate over time is that when it starts to rise, it does so suddenly and quickly. The tighter credit outlook will further limit economic growth as businesses struggle to refinance, leading to even more layoffs, and the impact on demand will exacerbate the painful dynamic.

Mindful of these trends, I think it’s likely that the Fed will suspend rate hikes at the June Federal Open Market Committee (FOMC) meeting and then hold steady for a while as rates rise. high start to do damage. We should not forget that the economic data published is retrospective. The US Conference Boards leading economic index fell 1.2% in March, more than double February’s decline. This downward trend is likely to continue as the consequences of the bank credit crunch ripple through the economy, punctuated by damage to balance sheets from falling collateral values. Dark clouds are gathering.

If the Fed takes a break in June, that would be good for bitcoin, as it implies an easing of financial conditions.

While rates themselves may not change, expectations of cuts on the rapidly approaching horizon should be enough to move the liquidity needle, barring the 1960s, an extended pause after a series of hikes. has always been followed by reductions. Moreover, financial conditions are not only defined by the federal funds rate: they are also influenced by bank earnings and policies, the price of oil, the level of the dollar, fiscal policy and the credit outlook in the world, among other factors.

Indeed, while the Chicago Fed’s National Financial Conditions Index, which tracks US capital markets as well as the shadow banking sector, shows a tighter environment than a few years ago, it is heading decline, which means greater market liquidity.

This is important for bitcoin because it is one of the most sensitive assets to changes in global liquidity. You probably often hear that risky assets benefit from looser monetary conditions. Well, bitcoin is the ultimate risky asset in this regard:

We can expect BTC to continue to act as a barometer of liquidity, as it did in January and again in March, once the Fed’s interest rate policy shifts into mode. wait-and-see. And liquidity is likely to increase once peak rates are reached and as the impending recession becomes increasingly evident.

Although bitcoin is the most macro of all crypto assets, the macro environment also influences other crypto assets, in different ways.

Bitcoin remains the anchor asset of the crypto market, with increasing dominance (percentage of total market cap) and high correlation to other tokens. In other words, what happens to bitcoin affects sentiment across the entire market cap chart.

It does this by paying increased attention to the entire ecosystem, which encourages new businesses as well as their funding. A rising BTC price justifies investment in market infrastructure and crypto asset services, which in turn support access and liquidity for other assets. Where BTC goes, the market tends to follow.

Additionally, once funds become comfortable with an allocation to BTC, many will look for even higher return opportunities, which means moving up the risk curve. This tends to be encouraged by easing financial conditions, with the potential gains more than offsetting the cost of leverage.

There is also the special case of ether (ETH), which is more directly impacted by macro returns. Currently, betting on the Ethereum network yields about 5% rewards, not considering price appreciation. It’s less appealing to macro investors when US government bonds offer similar risk-free returns, but as those fall, the equation changes. Additionally, the relatively stable yield of ETH presents upside potential. Now that staking is flexible after the recent Shapella upgrade, macro investors are more likely to consider ETH over other stablecoin income opportunities, especially if it’s viewed as a window on a higher great participation in the ecosystem.

With the macroeconomic outlook and the likely path of monetary policy at one of the most uncertain times in recent history, a step back to examine the broader investment landscape may reveal pockets of opportunity and highlight stories that didn’t exist the last time. the global economy found itself in a similar position. For the first time, we have assets that do not depend on the considerations of traditional economics for their operation, and which embody a range of emerging use cases which, in turn, lend resilience to investment theories. .

All business cycles have certain patterns that tend to repeat themselves, this is one of the reasons why they are called cycles. Crypto markets also have cycles, only these in the past have been driven primarily by crypto-specific factors. Not anymore, the crypto market has multiple drivers, making the narratives more complex while opening the market to new cohorts of investors.

This should not only continue to bridge the gap between the crypto and macro landscapes; it should also pay even more attention to the unique characteristics of crypto assets.

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