Has the Crypto Market Bottomed Out? Opportunities Hidden Behind August's Correction

Has the Crypto Market Bottomed Out? Opportunities Hidden Behind August's CorrectionAugust was undoubtedly a tough month for the crypto market, with Bitcoin (BTC) experiencing a 30% correction, from its high of $70,000 to a low of around $49,000. However, analysts predict that the decline below $50,000 may mark the bottom of the correction, with improvements expected in the final quarter of 2024

Has the Crypto Market Bottomed Out? Opportunities Hidden Behind August's Correction

August was undoubtedly a tough month for the crypto market, with Bitcoin (BTC) experiencing a 30% correction, from its high of $70,000 to a low of around $49,000. However, analysts predict that the decline below $50,000 may mark the bottom of the correction, with improvements expected in the final quarter of 2024.

Andr Dragosch, Head of Research at ETC Group, analyses that the sharp sell-off in both crypto assets and traditional financial assets during August stemmed from mounting recession fears in the US. A disappointing US jobs report in July, showing a rise in the unemployment rate, fueled popular recession indicators like the Sam Rule, becoming a major catalyst.

Dragosch further explains that the sharp appreciation of the Japanese Yen (JPY) also sent shockwaves through traditional financial markets. As the Bank of Japan raised Japans key interest rate, arbitrage traders unwound positions, intensifying risk-off sentiment in early August. This event led to a plunge in crypto sentiment to its lowest level since the FTX collapse in November 2022, coinciding with a sharp decline in cross-asset risk appetite in traditional financial markets.

Despite this, Dragosch believes that the macro and crypto sentiment crash in early August was likely a signal of a significant tactical bottom for Bitcoin, marking the beginning of a new bull run. He points out that financial markets quickly priced in a reversal of the Feds monetary policy following market turmoil in early August, with Federal Reserve Chair Jerome Powells speech at the Jackson Hole symposium further confirming this.

Powell indicated clearly that the Federal Reserve was on the verge of reversing its monetary policy, with a potential start this month, amidst a softening labor market. Expectations of looser monetary policy will provide a positive impetus for Bitcoin and crypto assets in the coming months.

Dragosch highlights that as carry trade unwinds, the value of the Japanese Yen rises because arbitrage traders unwind their positions, selling off foreign currency assets to buy back their Yen short positions. The Yens appreciation is consistent with broader global growth expectations weakening due to increased US recession risks, an observation also aligned with the continued rise of gold prices amid safe-haven demand and increased expectations of a Fed policy pivot.

With Fed Chair Jerome Powell indicating that a shift in monetary policy is imminent, with a September rate cut on the table, ETC Groups market-based monetary policy expectation indicator now clearly shows positive expectations towards monetary policy. Fed fund futures have already priced in slightly over nine rate cuts of 25 basis points each, ending at a 3% terminal rate, which will be reached by the end of 2025. Therefore, the market has already anticipated a significant reduction in the Fed funds target rate.

Despite this, Dragosch states that ETC Group's base case remains that a US recession is a reality. The US economy has likely already slipped into a recession. If a recession materializes, markets will likely contemplate further Fed rate cuts, as the average Fed funds rate cut during past US recessions has been about -340 basis points (median: -300 basis points).

Dragosch emphasizes several reasons for projecting a US recession, including the triggering of the Sam and Mel Rule, a clear sign of an impending recession, while the gap between expectations and current conditions in the Conference Boards Consumer Survey widened to new cycle highs in July, suggesting we are already in a recession. The widening gap between the prominent hard to find a job and enough jobs sub-indicators also suggests that US consumers perceive a significant deterioration in labor market conditions.

Another factor indicative of widespread US labor market weakness is the recent downward revision to wage growth. Nonfarm employment growth has been revised down by 81.8k through March 2024. As institutional survey data show a significant decline in the number of US establishments, contrary to what household surveys and wage data still suggest, US wage revisions are likely to persist moving forward. Therefore, Bureau of Labor Statistics wage statistics will likely continue to overestimate the true condition of the US labor market until further revisions.

Although leading indicators of unemployment have not yet signalled an imminent surge in layoffs, this could change in Q4, as layoffs tend to be announced around the end of the year. Recent increases in the unemployment rate have largely been driven by a significant decline in job openings and hiring across the economy. This is also reflected in LinkUp10000 data as well as job openings data released by Indeed, with job openings continuing to decline, consistent with official job openings statistics from the JOLTS data.

Dragosch highlights that while a recession is a negative development for most assets, several factors suggest that this could be positive for crypto. The macro capitulation in early August coincided with crypto sentiment capitulation, which greatly limited further downside. On August 5, market-based global growth expectations hit multi-year lows, while ETC Groups internal crypto sentiment index hit its lowest level since November 2022, when the FTX collapse occurred. A significant growth scare appears to have been priced in, so the impact of an actual recession on crypto's future performance may be minimal.

The second positive factor is that Bitcoins sensitivity to global growth expectations is declining, which lowers the risk of a potential US recession for crypto assets. We are moving from headwinds (growth) to tailwinds (monetary policy, USD).

ETC Groups macro model indicates that Bitcoins performance over the past 120 days has been explained more by other macro factors, like monetary policy expectations or the USD (which provided tailwinds), than by changes in global growth expectations (which have been headwinds). In particular, we are also seeing a growing share of Bitcoins residual/non-macro/coin-specific factors in explaining its performance, implying that Bitcoin is becoming increasingly detached from increased US recession risks.

Third, the tide of monetary policy is turning, with the Fed poised to cut rates for the first time. Fed fund futures price in a total of nine 25 basis point cuts through the end of 2025, with a terminal rate of roughly 3%. G5 central banks are shifting towards easing, and global money supply has recently reached all-time highs. Expansion of global money supply tends to be a bullish environment for Bitcoin and crypto assets.

The fourth reason to be bullish on Bitcoin is that the USD has been weakening, which tends to be a bullish environment for Bitcoin and crypto assets. A weak USD environment tends to be optimal for Bitcoin and vice versa. Reversals in Fed monetary policy associated with rate cuts and quantitative easing (QE) tend to be bearish for the USD, which should provide a significant tailwind for Bitcoin and crypto assets moving forward.

In conclusion, the simultaneous capitulation of macro and crypto sentiment in early August provides a good foundation for a more sustainable bottom for Bitcoin. Furthermore, Bitcoins diminishing sensitivity to changes in global growth expectations combined with a shift in global monetary policy, coupled with the widespread weakness of the USD, could deliver very positive macro tailwinds for Bitcoin and crypto assets moving forward.