An overview of the macro environment in 2023 and impact on crypto.
Does this look familiar to you?
You are not alone. “The macro" dragged most portfolios down into the abyss in 2022. Many are wondering if the good start to 2023 is the last chance to get out or a fresh start to the crypto cycle.
In the by-the-numbers analysis of the bear market bottom, we saw most leverage has been flushed out. That means big movements will, once again, be dominated by the macro. That is why this article will brief you on everything you need to know about macro in 2023:
- The situation before 2023 started.
- What the good first two months mean.
- What you can expect from macro for the rest of 2023.
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The Macro Situation Going Into 2023
As an avid Academy reader, you’d surely remember last year's macro analyses about the bear market and how inflation is still running hot. That's why this section will be a quick and easy update.
The crypto market plunged in 2022 because macroeconomic conditions worsened:
- The war in Ukraine sent shockwaves around the world.
- Inflation surged.
- China was still in lockdown and became increasingly unfriendly to the US.
- Oh, and then there were some issues in the crypto markets themselves.
Crypto reacts to liquidity and not to inflation. The more liquidity, meaning money, there is in the global financial markets, the higher crypto (and other risk assets) prices shoot. But because inflation shot up hard and fast, central banks in the US and Europe had to shut down the money printer — and crypto prices tanked as a result.
Uncertainty and fear in the markets lead investors to rush out of risky assets and into safe ones like US Treasuries, which is debt by the US government. Moreover, the Federal Reserve tried to put the brakes on inflation. The Fed does that by hiking interest rates, by raising the federal funds target rate.
The more investors buy treasuries, the stronger the dollar gets because you need to pay for them in dollars. This is bad for investors as it impacts companies' revenues, earnings and stock prices.
Furthermore, Fed chair Jerome Powell has reiterated that they would continue raising rates to hit their inflation target, which could see a hard landing for the economy, with many expecting a recession to hit within these two years.
That is a short overview of where things stood on January 1. So how have these predictions been going so far?
The Macro Situation In 2023 (So Far)
So far, 2023 is off to a much better start than anyone expected. Bitcoin is up over 40%:
There were a couple of crypto-specific narratives that contributed to this surprisingly solid start:
- ETH liquid staking derivatives are gaining in popularity in anticipation of the Shanghai Upgrade.
- There has been much talk of a “crypto China narrative” that led many coins with Chinese teams to pump
- On-chain data and other indicators suggest there weren’t many sellers left at $16K.
But macro data gave crypto a big leg up as well.
There was a significant liquidity injection from the People’s Bank of China to prop up the Chinese economy post-lockdown. This was likely one of the catalysts for the “China narrative” to emerge:
We don’t know how much that really contributed to rising prices. But we do know that more liquidity is good for crypto. So it sure didn’t do any harm.
Another reason was that inflation rates were decreasing a bit more quickly than expected. This matters because inflation rates determine what the Federal Reserve does.
Here’s how this works:
Many expect the Federal Reserve to keep interest rates on US Treasuries (remember: debt by the US government) high only as long as it absolutely needs to. The government already sits on a pile of debt. Higher interest rates mean new debt is becoming more expensive to finance. Every quarter percentage point results in billions saved. That’s why many analysts expect the Fed to “pivot” sooner rather than later and start lowering interest rates.
The Fed promised not to pivot any time soon, but markets don’t buy this story and rallied hard. The rally caught short positions by surprise. The short squeeze was one of the biggest in recent years and acted like a fire accelerant:
Which brings us to the all-important question:
Can this market rally continue?
The Macro Outlook For The Rest Of 2023
There are a few rules of thumb for crypto and macro:
- More liquidity is good (commonly known as “the money printer”).
- A stronger dollar is bad.
- The crypto market is the first to react in either direction.
Regarding the second point, there’s some bad news…
Source: Bitcoin Magazine Pro
The US Dollar Currency Index has been strengthening in the last few days, which coincided with the crypto rally stopping around $25K for one bitcoin. This development is driven by the crucial macro questions for 2023:
- Will inflation come down to the Fed’s 2% target?
- Will we get a recession?
- Will the Fed “pivot”?
Where prices go will depend on the outcome of these three questions.
Start with inflation. Geopolitical analyst Peter Zeihan thinks 2023 will be the best year for inflation for the foreseeable future. He predicts “higher for longer” inflation for different economic reasons:
Macro expert Lyn Alden also thinks inflation is here to stay. However, she sees this year as part of a disinflationary period in a longer-term inflationary environment. Translation: inflation is coming down now but not down to 2% and not for long.
But after a quick start out of the blocks, markets fear that inflation may stay elevated even in the short run. Data from Europe is not looking good. It’s too early to say whether the US has a similar problem. Economic data is still coming in strong. But persistent inflation would put the Fed in a tough spot, where further rate hikes can inflict lasting damage on the economy.
Next topic: a possible recession. The Fed is aiming for a “soft landing,” meaning it wants to bring down inflation without a recession. But as long as the unemployment rate stays low, there will be no recession at all. Paradoxically, no recession is bad for the markets because the Fed cannot add liquidity. Remember: more liquidity is good for crypto.
That’s what people mean on Twitter by “good news is bad news.” The data suggests there is still too much good news.
Which brings us to the last point: a possible Fed pivot. A week ago, this topic would have been clear: interest rates were supposed to stay “higher for longer.” Analysts predicted it’s not on the cards until something “breaks.” But then not one, not two, but three banks with crypto ties failed. And now rate hikes seem unlikely. Even rate cuts could be on the cards:
Silicon Valley Bank may have been the necessary catalyst for “breaking something” the Fed needed to pause hikes. The upcoming weeks are about to get very interesting.
Conclusion
For crypto, all of this means that we are probably in accumulation mode in 2023. If rate cuts do arrive as early as September 2023, Bitcoin may break out of its current range this year.
Macro in 2023 will set the tone for crypto’s medium-term price development. Developments that bring forward more liquidity and lower interest rates would also bring forward the start of a new bull market. There are a lot of moving pieces, such as the question of “recession or no recession,” and how the Fed reacts to the problems in the banking sector.
But unlike in 2022, bad macro news may, in fact, be good news for crypto.
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. Please do your own research.
