After a brutal 2022, will the crypto market return to growth in 2023?
The year 2022 turned out to be a game-changer for the digital asset market. After the market of 2020–2021 experienced exponential growth, the year’s peculiar events brought attention to the industry’s flaws. They demonstrated the value proposition that digital assets offer market participants compared to traditional finance.
The crypto market cap reversed in the final weeks of 2021 and 2022 after reaching an all-time high of $3,009 billion on November 10. On November 21, 2022, the bearish year drove the market capitalization of cryptocurrencies to a 2022 low of $727.58 billion.
This week, Bitcoin appears to be establishing strong support around the $21,000 level and may soon reach beyond its current $23,000 resistance. The crypto winter might finally be coming to an end as the market increasingly exhibits signs of a budding bull run.
The cryptocurrency market has seen a 23.82%% increase in the past 24 hours and is now worth $965.09 billion. This is due to encouraging macroeconomic indicators such as the improvement of US inflation statistics and forecasts that the global recession will end in 2022.
But back to the main point: will a new bull market begin in 2023? It’s impossible to know for sure, but here’s what investors need to watch.
1. The inflation rate
The Federal Reserve dominated the narrative last year as its aggressive rate hikes caused stocks to tank, especially unprofitable growth stocks with stretched valuations. The reason for the rate hikes was unusually high inflation, which peaked in the CPI at 9.1% last June on a year-over-year basis.
The faster inflation falls, the more likely it is that the Federal Reserve will ease off on rate hikes since its goal is to bring it back down to 2%. Fed Chair Jerome Powell has said that rates would remain elevated until inflation reaches that goal.
While the CPI is the inflation measurement most investors tend to follow, the Fed prefers a different gauge: personal consumption expenditure (PCE), which it considers more comprehensive than the CPI. The most recent PCE report in November showed that the index rose 5.5% year over year.
In its December projections, the Federal Reserve called for PCE inflation to decline to 3.1% by the end of 2023, approaching its long-term goal of 2%.Keep an eye on PCE. If it’s trending below the Fed’s forecast of 3.1% by the end of the year, that will be bullish for stocks.
2. Interest rates
All eyes have been on the federal funds rate over the last year, which is now at 4.25%-4.5%. But that’s not the only interest rate that matters. Treasury yields also influence stocks, and they tend to have an inverse relationship. When bond yields rise, crypto market tends to fall, and when bond yields fall, crypto market tends to rise.
Though the Federal Reserve has forecast another 75 basis points in rate hikes this year, the interest rate on the benchmark 10-year Treasury Note has actually fallen substantially from its peak in October at 4.33% all the way to 3.45%. That shows that investors believe the risk of interest rates remaining elevated for a long period of time has gone down, and it could also signal that cryptocurrencies have become more attractive. The decline in interest rates has come as inflation has cooled off.
It’s also worth watching the yield curve, in particular the difference between the 2-year and 10-year Treasury yields. Normally, the 10-year has a higher yield than the 2-year, which is typical for longer-dated bonds. But the yield curve has inverted, meaning that the 2-year now pays more than the 10-year, as the chart below shows.
The yield curve tends to invert when investors expect the federal funds rate to fall over time and see more risk in the short term than the long term. Historically, an inverted yield curve has been a leading indicator of a recession, though it’s unclear if that will hold true this time.
Still, a normalization of the yield would be seen as a positive by crypto investors.
If the Fed stops hiking the federal funds rate, that could bring interest rates down further, which would also be bullish for crypto market.
No one knows for certain if or when another bull market will start in 2023, but if inflation keeps falling toward 2%, the Fed stops hiking rates, it seems like a good bet that a new bull market will begin.
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