Nội dung bài viết
Macroeconomy
The Coronavirus
In November 2019, the name “Coronavirus” was still relatively unknown to the majority of the world. However, within just a few short months, it had transformed into a pandemic that was terrorizing communities across the globe. The highly contagious pathogen was capable of disrupting nearly every aspect of society, causing lockdowns and quarantines, bringing commuting to a halt, and causing trade cancellations. The enormity of the impact caused by this microscopic pathogen was truly staggering. Even after three years have passed since its appearance, in 2023, we are still feeling its effects rippling through the global economy.
Under the attack of COVID-19, the entire world economy took an unparalleled level of economic disruption. The pandemic has resulted in a decline in global Gross Domestic Product (GDP), with the World Bank reporting a contraction of 4.3% in 2020, marking the worst year for the global economy since World War II (1).
Unemployment rates skyrocketed as well, with the International Labor Organization reporting a global unemployment rate of 6.6% in 2020 and an estimated 194 million people out of work worldwide (2). Trading in 2020 dropped 7.4% according to the UN, the steepest contraction since World War II (3). Furthermore, the pandemic has also had a negative impact on global stock markets, with the MSCI World Index declining by 12.4% in 2020, making it one of the worst years for global stock markets in recent history (4).
As the modern economic system was facing a trying time, the term “recession” began to make headlines in business and non-business-related news channels by 2022. “Recession” became a topic of frequent discussion and analysis as economists and experts sought to understand the current state of the economy and predict future trends.
Recession
A quick google search would return a broad definition of a rescission: “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”
To understand it simply, an Economic recession is a period of time when the economy, or the amount of money and trade being done, decreases. This often leads to people losing their jobs, businesses closing, and overall financial difficulties for individuals and the country as a whole.
The recession narrative had gathered so much heat to the point that the US government had to step in and soothed the market by emphasizing that a “recession” involves more than just two consecutive quarters of negative GDP growth. The White House pointed out that other aspects of the economy, such as the labor market, consumer and business spending, industrial production, and incomes should be taken into account when determining if a recession is occurring (5). Effectively, the Government was trying to alter the definition of a recession in an attempt to keep that label off of the United States.
Interest rates and Inflation
Historically, in the face of these adverse events like this, The US Government and the Federal Reserve (FED) would simply tap into their familiar playbook: lowering interest rates and injecting cash into the economy through Quantitative Easing (QE). However, by the end of 2022, these two solutions were off the table.
The reason was simple, interest rate cuts and QE had been overused in the past two years in an effort to keep the economy afloat. As a result, the amount of US dollars in circulation grew nearly five-fold from over $4 trillion to $20 trillion within 22 months, starting from January 2021 (6). Money was too cheap and too abundant for too long had created the ideal conditions for inflation to take hold.
Along with the growth of inflation, the interest rate has to raise accordingly to avoid a “negative real interest rate” scenario, in which the inflation would intensify and create a cascade event that could yield a catastrophic event.
Hence, going into 2023, the primary challenge for the economy will be to rein in inflation so that the market can lower interest rates and jumpstart the economy once again. Maintaining a delicate balance between inflation control and economic stimulation will be the key focus of monetary policy in the coming year.
The potential impact on the crypto market?
A bleak macroeconomic weather, like the one we are in at the moment, usually ruins the risk appetite of investors and herds them to more stable assets. Cryptocurrency, being one of the riskiest investments in the financial market, is facing the consequences of this shift in investor behavior. The entire crypto market once at its all-time high of 3 trillion dollars in November 2021, is now valued at around 1 trillion dollars. The “blue-chip” cryptocurrencies have suffered greatly, while many alternative coins have lost significant value or become effectively worthless
However, for “every cloud has a silver lining”, there are still potential catalysts on a macro level for the cryptocurrency sector in 2023.
Bitcoin as an “inflation hedge”
During economic turmoil and inflation running wild, everyone is looking for a shelter to park their money while waiting for the storm to pass. Historically, gold was the asset of choice for being a “safe haven asset”, where all institutional money pour into until the market recovered. However, this economic downturn has not yet experienced a significant bull run on the price of the precious metal. In fact, Gold is trading well below its 5 years peak in August 2020 – when it was trading at more than 2,000 dollars an ounce -, compared to today’s price of 1,864 dollars an ounce (7).
Bitcoin, on the other hand, gradually made its name known as a hedge against inflation, relying on the fact that there are only 21 million BTC can ever be minted. Can the most famous cryptocurrency dethrone gold to become a safe-haven asset? It is unlikely any time soon in the future. In the meantime, BTC is still perceived as a risky asset, where buyers expect significant upside in the future to compensate for the risk, rather than being seen as a sustainable means of storing value. However, if the story of Bitcoin as an inflation hedge keeps catching on, we might be able to see a new flow of money pouring into the sector.
Regulation sentiment toward cryptocurrency
Another potential ignition to jump-start the crypto market is the regulation sentiment towards the segment. On one hand, as time goes by, more and more people are open to the idea of a decentralized distributed ledger. On the other hand, a series of scandals in 2022 that involved billions of dollars and thousands of people have left a negative impression on the industry.
In the meantime, we are getting mixed signals from the regulations towards crypto and the regulation’s sentiment could lie on either side of a coin toss. However, one can be confident that the moment big governments turn a friendly sentiment towards crypto, we can expect to see more than a few green candles.
CBDC
Central Bank Digital Currency (CBDC) is another influencing factor. CBDC is the government’s version of cryptocurrency. While not necessarily decentralized (in fact, quite the opposite), CBDC does employ blockchain technology thus giving the whole sector an extra brownie point.
While CBDC issuance could yield both positive and negative results to the entire industry, the writer would argue that the impact is on the net positive territory. First of all, CBDC is an official validation of blockchain technology, giving deserving credibility over the value of a decentralized distributed ledger. Second, with CBDC being live, the on-ramp from fiat to cryptocurrencies would be drastically improved, which naturally entails an influx of new users into the sector.
Conclusions and afterthought
In conclusion, the cryptocurrency market is a highly dynamic and constantly evolving space that is significantly influenced by a range of macroeconomic factors. Given the current economic downturn, it is of utmost importance to pay close attention to:
- Inflation and interest rates: monitor the interest rates from the FED and large Central banks worldwide. Any rate cut or merely the stopped rising of interest rates could be a meaningful catalyst to the crypto market.
- Risk-on: pay attention to the signals on the market that suggest the risk appetite is back on the menu. These telltales are ranging from the rise of riskier shares on the stock market, the rise of stock indexes from emerging countries to higher bond yields, and the decline in the gold price.
- Regulation sentiment and policy towards crypto: a friendly regulation environment is arguably one of the “must-have” conditions for a flourishing and sustainable crypto market. Better regulation is equal to “more open” in some aspects but could also mean “more restricted/controlled” in others.
- CBDC: any announcement of CBDC from a country could be an important catalyst to the crypto market.
After thought
In addition to the macroeconomic factors discussed, it is important to remember that the long-term value of a cryptocurrency project is ultimately determined by its micro-level performance. Despite the current market conditions, navigating a bear market can provide valuable experience for investors in preparation for the eventual return of the bull. It is now a prime opportunity for investors to carefully research and identify valuable projects for long-term investment.
Reference
- https://blogs.worldbank.org/opendata/understanding-depth-2020-global-recession-5-charts
- https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?end=2021&start=2007&view=chart
- https://unctad.org/news/global-merchandise-trade-exceeds-pre-covid-19-level-services-recovery-falls-short#:~:text=According%20to%20the%20report%2C%20world,when%20trade%20fell%20by%2022%25.
- https://www.msci.com/documents/10199/149ed7bc-316e-4b4c-8ea4-43fcb5bd6523
- https://www.whitehouse.gov/cea/written-materials/2022/07/21/how-do-economists-determine-whether-the-economy-is-in-a-recession/
- https://techstartups.com/2021/12/18/80-us-dollars-existence-printed-january-2020-october-2021/
- https://www.tradingview.com/symbols/XAUUSD/
