Crypto’s Pause: Consolidation Phase Hits Leading Cryptocurrencies

Consolidation Phase Hits Leading Cryptocurrencies

Over the past month leading cryptocurrencies have been in consolidation mode as reflected in the Trakx Top 10 Crypto CTI dipping 4%. After such a strong rally since the start of the year (Trakx Top 10 Crypto is up 35% YTD), a period of relative quiet is hardly surprisingly. However, the lack of price movement – crypto volatility has fallen sharply (see chart) - also reflects high uncertainty about the macro backdrop.

30-Day Standard Deviation of Daily Returns

The absence of further US bank failures, which provided cryptocurrencies will strong positive price momentum in early March, has eased immediate worries about the health of the US financial system. At the same time, it has also allowed Fed officials to continue to sound hawkish, something they very much want to do with inflation so far above target and the jobless rate sitting a multi-decade lows.

Investors have clearly been caught off-guard by this continued hawkish stance as evidenced by US interest rate futures having shifted from pricing in Fed rate cuts to anticipating a 30% chance of a 25bp rate hike at the June 24 FOMC meeting.

Notwithstanding the short-term schizophrenic pricing of US interest rate futures, there remain lingering concerns about the health of the US economy given the latest Fed Senior Loan Officers Survey showed across-the-board tighter lending standards being applied by banks and slumping demand for commercial and industrial loans11 – see chart. We have seen divergence on this scale before: in the aftermath of the Covid Pandemic and during the GFC. On both occasions the US economy suffered a recession.

Obviously, no one can predict with confidence how the US economy will perform over the coming quarters. There are many eerie similarities between now and the Great Recession, but also some fairly significant differences.

Some take comfort from the fact that the US banking crisis seems to be “contained” (language Fed governor Bernanke used back in 2007 in relation to subprime mortgages) and on that basis hope for a soft landing. I am less convinced because there is no escaping the fact that the macro landscape is worse. Not only is inflation uncomfortably high for the Fed, meaning the hurdle to monetary easing is higher than in 2007, but government debt is also substantially higher, which means less room for anti-cyclical fiscal policy, irrespective of the recent game of chicken with the debt ceiling. Given this, I would not be at all surprised if the US economy surprises on the downside.

Bitcoin was unleashed on the world very early in 2009 and was very much on the periphery of finance - not to mention the world-at-large - until well after the end of the Great Recession, so we have no precedent for how crypto performs during recessions (the Covid recession doesn’t count in my mind because it was more akin to pushing a pause button on the global economy). However, if one looks at gold’s performance during the Great Recession it sold off sharply as the economy started to tailspin (30% drawdown) before doubling once it became clear US policymakers were prepared to throw an entire kitchen sink’s worth of reflationary policies at the economy in order to kickstart the recovery.

History may not repeat but it does rhyme. Unless one believes that US policymakers will be able to achieve the perfect soft landing, then it probably means that crypto will experience some short-term selling pressure as investors increase the risk of a harder landing. However, 2024 is an election year and recessions do not play well with the voters. So, while it may take some economic pain to get them there, eventually US policy makers will respond with a reflationary policy mix – a “macro” prelude to much higher crypto prices.

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