Recession fears spark bloodbath: Why are crypto markets plunging?

Author: Stacy Muur Source: substack Translation: Shan Ouba, Golden Finance

The last time we saw a similar drop in the cryptocurrency market capitalization was in early July, when Germany began selling off BTC. This time, the catalyst came from Web2, specifically the stock market.

Stock Market, Interest Rates, and Unemployment

First, let's explain some fundamental factors that are critical to the global economy and that directly affect the stock market and the cryptocurrency market.

Lower Interest Rates: When interest rates fall, companies can borrow money more cheaply and reinvest their revenue more efficiently. This is seen as a positive sign for the stock market because the economic environment becomes more favorable.

Now, let's dive into the current drama.

July 31: Jerome Powell announced that interest rates could be cut in September if the U.S. economy develops as expected. This potential rate cut has already been factored into stock prices, becoming a clear positive catalyst for stock market growth over the past few months.

August 2: The Labor Department released its employment report, showing that the U.S. unemployment rate jumped to 4.3% in July, close to its highest level in three years. This increase increases the likelihood of an immediate rate cut - the sooner the better - but also casts a different shadow on the U.S. economy: a higher-than-expected increase in unemployment.

In June, U.S. central bank policymakers projected just one rate cut this year and expected unemployment to reach 4% by the end of the year. However, given the current situation, multiple rate cuts are possible.

You might argue, "Rate cuts are good - that's exactly what you said."

Yes, but the unemployment rate is a more critical potential bearish catalyst. The rise in the unemployment rate in July triggered the so-called Sam's Rule, a historically accurate early indicator of a recession.

What happened next? A flurry of panic selling.

The devil is in the details

As headlines often do, the (often exaggerated) focus of the story comes first, with more context revealed near the end, where it is least read.

First, a note on Hurricane Beryl. The household survey showed that 436,000 people reported that they were unable to work due to severe weather last month, the highest number on record in July. In addition, 249,000 people were temporarily laid off.

Second, consider immigration. About 420,000 people entered the labor market last month, while household employment increased by only 67,000. The number of people working part-time for economic reasons increased by 346,000 to 4.6 million. However, the number of permanently unemployed and long-term unemployed was almost unchanged.

Claudia Sahm, an economist who previously worked at the Federal Reserve and creator of the Sahm Rule, warns against taking too strong a signal from her rule.

Long story short, recession fears are probably overblown – but weaknesses do exist and need to be addressed.

Japan Rate Hike

The second catalyst for the global repricing was the Bank of Japan raising its interest rate target to 0.25% – the highest level since 2008.

During periods of negative interest rates, many Japanese investors borrowed yen at low rates to buy higher-yielding U.S. Treasuries, a practice often referred to as the "carry trade." However, as the Bank of Japan raises rates, this trade becomes less effective and some investors may bring the money back home.

Panic is poison

Whatever the cause, the next jobs report and further action from the Federal Open Market Committee on rate cuts will play a fundamental role in market pricing.

• Stock markets reacted immediately to the news.

• The dollar fell to a four-month low against a basket of currencies.

• U.S. Treasury prices rose, with the benchmark 10-year Treasury yield falling to its lowest level since December.

• The Chicago Board Options Exchange Volatility Index rose to its highest level since April.

• Japan's Nikkei 225 also fell nearly 5%, posting its biggest one-day drop since 2022.

Naturally, the turmoil affected the cryptocurrency market, leading to a series of long liquidations.

What's next?

Expectations for Monday’s Volatility

Unlike stocks, cryptocurrencies are traded 24/7. In my opinion, it is very likely that the stock market will continue to fall on Monday, which will drag the cryptocurrency market lower. The announcements next week will play a fundamental role in curbing panic, but will not have an immediate effect.

Further Action

Another catalyst that cannot be ignored is the US election. The United States will strive to keep its economy attractive, so medium-term stock market volatility may be suppressed.

Cryptocurrency Market

When it comes to the further trend of cryptocurrencies, I tend to agree with Revelo Intel’s expectations rather than the so-prevalent bullish thesis on ?.Hope is not the best investment strategy.

• New high FDV tokens (such as Monad, Berachain, Scroll, and possibly Linea) will enter the market, diluting the liquidity and trading volume of other tokens in the portfolio.

• Expectations of traction after the halving may be too optimistic, given recession fears and the realities expected after the US election.

• Social sentiment around cryptocurrencies is also not optimistic (I will publish an in-depth analysis later next week). There is no reason for the average person to rush to buy Bitcoin in the coming months.

In other words, I personally expect the market to be flat in August and September. Bitcoin will probably remain in the $60,000-$65,000 range, while Ethereum will be closer to $3,000. However, this situation can change at any time, and I am basing my conclusions on the facts I have at hand at the moment.