Article by Matt

2 January 2023 (Updated 29 May 2023)

December 2022 Market Review

It's time to take a step back and look at the current state of the crypto market and where things might be heading in the next few months.

Flight to safety in Bitcoin and stablecoins occured during December.
US inflation continues to drop and interest rates continue to rise.
FED pivot into reducing rates looks likely to be in the next 3 to 6 months.
Sideways crypto price action expected in Q1 and Q2 2023, after which we will hopefully start to see signs of recovery.

Top Cryptos Price Movements

Bitcoin has been flatlining throughout December following the FTX fraud. It has continued to hover between 16,000 and 17,000 throughout the month. Meanwhile, the top 10 altcoins have continued to lose value mostly likely due to their perceived higher risk and a flight to safety back into Bitcoin and stablecoins.

Monthly price movements for the major cryptocurrencies

Crypto Market Performance vs GOLD vs S&P 500

Bitcoin is down 64.8% on the year with Ethereum and other altcoins reporting similar or worse changes over the period. Bitcoin has been in a bear market for 418 days, making it the second longest bear market in crypto history. By 10 January 2023 this Bitcoin bear market will be the longest of all time, exceeding the 427 day bear market in 2014/2015.

12 month performance of crypto vs gold vs S&P 500

Inflation

Official inflation figures for the US now seem to be firmly heading down. Meanwhile, the Eurozone rates continue to head higher across the board. True inflation figures are likely running at double these official rates.

Annual inflation for key countries over the last 40 years

Interest Rates

The US has continued to aggressively raise interest rates, with rates now at 3.9%. At this rate the interest due on the US $31T national debt when it is refinanced will be $1.2T per year. That's 25% of the entire tax revenue of the US being spent purely on debt interest. It is abundantly clear that this is not financially sustainable, especially given the further $1.7T of further spending that the US government has just signed off.

Interest rates for major central banks over the last 40 years

Currency Values

The value of the US Dollar has continued to drop over the last month, with corresponding increases in the value of the Euro. A weakening dollar will continue to add inflationary pressure to the US economy as import costs increase.

Value of the US Dollar, Euro, Japanese Yen and Pound sterling over the last 12 months

US Inflation

Whilst the official rate of inflation in the US is falling it still remains significantly higher than the current interest rate level. If the official inflation rate keeps falling at its current rate and interest rates keep rising at their current rates then we can expect interest rates to peak in Q2 2023 at somewhere above 5%.

US inflation vs interest rates over the last 40 years

When Will the FED Pivot?

This forecast correlates closely with the CME Group forecast of interest rates peaking at 5.1%. The anticipated peak rate continues to increase every month so the final peak rate may well hit 5.5% or higher.

Chart showing the anticipated peak us interest rate

Meanwhile, the number of days until a FED pivot is forecast at 182 by the CME Group. That places the pivot at the end of June 2023.

Chart showing the days remaining until the FED pivots

The FED has managed to continue to reduce the size of its balance sheet over the course of the month. It remains to be seen how much longer the FED can keep this up, given the enormous $1.7T spending package that has just been signed off by the US Government and that will require financing.

FED total assets over last 40 years chart

The dual mandate of the Federal Reserve to maintain price stability and to maximise employment means that the FED and speculators continue to watch the unemployment rate closely. Official US unemployment continues to remain low, but as we can see in previous cycles, the true damage of rate rises is only felt some months after the FED starts to ease off on rate increases.

US unemployment over last 40 years

So where does that leave Bitcoin and the crypto market? As things stand it seems that global interest rates will continue to head higher over the next 3 to 6 months before finally easing off. The US economy is likely already in recession as are many European economies. This will increase pressure on central banks to pivot and begin reducing interest rates.

When the central banks do eventually pivot, that is likely to be positive for crypto and other risk assets. Of course the market will attempt to anticipate this pivot and so we could expect the crypto market to start showing signs of recovery before the pivot actually happens.

Some confidence can also be taken from the sheer length of the current crypto bear market. This is extremely likely to the be longest crypto bear market of all time. Whilst the current total percentage drop from peak is less than previous bear markets, these previous drops were measured from massive blow-off tops in price in 2013 and 2017 before the decline began. The most recent peak price in 2021 was not nearly as dramatic as these historic peaks and so it is reasonable to imagine that the total drop in price will also be less dramatic.

Overall it looks like we are heading for sideways price action for the next 3 to 6 months, after which we will hopefully start to see some signs of price recovery.