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The crypto market has been in a bear market for a long time. What is the relationship between the economic cycle of the macro environment and the crypto market? When will the bull market come? This article will help you interpret the future trend of the crypto market with data.
Review past cycles based on data
Outlook: Getting ready for the next cycle
Current on-chain market signals
Review of past cycles
To an outsider, cryptocurrency prices may appear to follow no rhyme or reason. However, the crypto market is actually very cyclical. Using Bitcoin as a benchmark, significant consistency was found over the past three cycles:
Retracement percentage per period peak: approximately 80%
Time to cycle bottom: 1 year from peak
Time to recapture all-time high from cycle bottom: 2 years
In addition, by comparing the US ISM Manufacturing PMI Index (Note: The US Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) shows the business environment of the US manufacturing industry in a specified month. The index is calculated based on a survey of representatives of hundreds of companies in 18 industries in the United States), it will be found that each cycle of the crypto market is almost completely consistent with the cyclical changes in the economic cycle.
Crypto cycles also coincide with global liquidity cycles:
Next cycle
With seven months to go until the next Bitcoin halving, Bitcoin has fallen about 80% from the high of the last cycle. Meanwhile, it took the market about a year to bottom out. It has now been 10 months since it recovered.
If history repeats itself, the all-time high should be breached in about 14 months (Q4-2024) and peak in Q4 2025.
Of course, this is a big if.
To understand future price trends, here are the potential influencing factors:
Turns in the business cycle (driven by monetary policy and global liquidity)
A strong market narrative
Continuation of the innovation cycle
New market entrants and new speculation (leverage)
So far, so good. Let's explore why.
Business cycles and liquidity
The author believes that global liquidity has bottomed out in October 2022. Since then, the Fed has been seen implementing a round of stealth quantitative easing (related to the banking crisis in March). Now China is struggling with deflation.
China's PPI and CPI turned negative year-on-year:
This has led the People’s Bank of China to start cutting interest rates recently. This bodes well for global assets like Bitcoin – as shown in the chart below.
China: Bitcoin and the total assets of the People’s Bank of China
Meanwhile, the People’s Bank of China has been buying gold, causing the spot price of gold in China to be more than $120 an ounce higher than the global price. Is the People’s Bank of China taking action before the yuan depreciates?
Looking at the US, over $7 trillion of debt is set to mature over the next year. The Fed will likely have to buy a lot of this debt as it needs to be refinanced. Moreover, interest payments on the debt currently account for over 31% of tax revenues (red line) – and tax revenues are falling, suggesting a recession is coming (grey line). How to increase tax revenues? Lower interest rates (green line).
Data: Federal Reserve FRED database
43 million Americans will resume student loans in October at an average interest rate of $503 per month.
The commercial real estate industry has more than $1.5 trillion in debt that needs to be refinanced in the next few years.
U.S. commercial bank lending is now at recession levels (grey line = recession):
Data: Federal Reserve FRED database
Continuing unemployment claims are starting to increase:
Data: Federal Reserve FRED database
Business Cycle / Liquidity Summary
The author looked at multiple data points in the FRED database, and most point to a recession. Given that liquidity appears to have bottomed out in October 2022, it is more likely to see an easing of monetary policy in the coming months until 2024 - but only if the economy really starts to slow down.
Assuming a recession enters in the next 6 months or so, a more dovish Fed policy could coincide perfectly with the Bitcoin halving schedule.
Innovation Cycle
Although the crypto winter is still going on, we can still see that public chains have made significant progress in infrastructure construction. This is especially true in:
Bitcoin is scaling on the Lightning Network and the Ordinals protocol is driving new demand for block space.
Source: Blockworks Research
As Moore's Law takes effect, Ethereum is also expanding through Layer 2. Note: Moore's Law is the experience of Gordon Moore, one of the founders of Intel. Its core content is: the number of transistors that can be accommodated on an integrated circuit will double approximately every 18 to 24 months. In other words, the performance of the processor doubles approximately every two years, while the price drops to half of the previous price)
EIP 4844 (scaling upgrade) is expected to be implemented in Q4. Significant progress can be observed on important improvements such as account abstraction (related to UX bridging assets), smart contract wallets, tokenization of real-world assets, stablecoins, liquid staking protocols, Eigen Layer (re-staking), data availability (Celestia), and DeFi blue chips.
The author believes that cryptocurrency's "broadband moment" is coming, which may usher in the next wave of consumer applications and new users.
Finally, competing L1 public chains (such as Solana) are showing strong resilience.
Narrative
Here’s what renowned investor Jeff Gundlach said at the recent Future Proof conference:
"Overall. I think the dollar is going to depreciate significantly in the next recession. That's because the response to the next recession is going to be a complete disaster relative to our fiscal position. It's going to be a wake-up call that the United States is bankrupt. We can't meet our debts. The United States has nearly $200 trillion in unfunded liabilities—almost 8 times GDP. In today's purchasing power, we'd have to pay 10% of GDP for the next 80 years. We're not going to do that. We're going to get rid of the dollar completely. We're going to see a restructuring of the U.S. financial system."
If this happens, you will see the following:
For the record, I don’t want a future Great Recession. But it’s important to consider that such a narrative could prevail if certain scenarios materialize.
Narratives are hard to predict. Did anyone foresee Paul Tudor Jones publicly sharing his views on Bitcoin last cycle? What about Michael Saylor and Microstrategy? Did anyone predict Tesla, Square (Block), and Mass Mutual would buy Bitcoin and put it on their balance sheets? Did anyone predict BlackRock would file for a Bitcoin ETF before this cycle?
Remember, the "stigma" associated with crypto is finally starting to fall away. BlackRock is a catalyst. This means that crypto is now entering a "tipping point" phase for traditional markets - new regulations "blessing" new technologies as they become more integrated with the traditional financial system. Recent court victories (Ripple, Grayscale, Uniswap) show the sea change that is happening.
Not to mention, the media loves crypto. There’s a reason major platforms like CNBC and Bloomberg continue to ramp up their crypto coverage. Crypto is very attractive. These outlets can’t wait to start pushing the next narrative.
But ultimately it is the market that determines the future narrative. But it seems to be consistent with the US economic cycle, the global liquidity cycle, the innovation cycle of the public chain, and the Bitcoin halving cycle.
On-chain Signals: Market Value vs. Realized Value
On-chain signal 1: MVRV. The ratio of market value to realized value is currently 0.41.
Historically, long-term investors have made a lot of money simply by entering the market when the MVRV signal is below 1.
Although the above explanation seems good, nothing is guaranteed. So where is the problem? The author believes that there are several points to note:
Inflation. If inflation does not continue to decline (or accelerate), then it will be difficult for the Fed to change monetary policy. This could delay or negate judgments about the economic cycle and monetary policy shifts.
No recession. As much as I hate to say it, the economy needs to be in real trouble for the Fed to adjust monetary policy. If that doesn't happen, the author's argument is unlikely to be borne out.
Regulation. It is still possible that the SEC will continue to take a hard line and block the BlackRock ETF from being approved. The author thinks this is unlikely, but it is still something to consider. #DeFiChallenge