US Recession Fears Could Quash Crypto Rally

Key Insights:

• Crypto markets have rallied 22% over the past week.
• The Atlanta Fed has revised its Q2 GDP prediction to -1.6%.
• Two quarters of negative GDP spells a technical recession.

Crypto asset markets have rallied 22% over the past seven days as total market capitalization gained $200 billion. The upswing in momentum has pushed the figure back to $1.1 trillion, the highest it has been for five weeks.

Markets are far from bull territory yet, however, and remain down 64% from their peak levels of more than $3 trillion in November 2021.

The momentum could be reversed very quickly as several macroeconomic factors come into play this month. Similar factors were responsible for the massive market crashes that have impacted stocks and cryptocurrencies this year.

U.S. Recession Looms

The U.S. Bureau of Economic Analysis (BEA) is set to release its advance estimate of second-quarter GDP (gross domestic product) growth on July 28.

GDP measures the market value of all the final goods and services produced in a specific period by a country.

This is significant because two consecutive quarters of negative GDP means that the country could be in a technical recession. The U.S. figure for Q1 was -1.6%.

The Atlanta Fed revised its GDP prediction on July 19 to the same as that for Q1 at -1.6%. Crypto critic Peter Schiff observed that most of 2022 has already been in a recession:

The Atlanta Fed lowered its Q2 #GDP forecast again. It now stands at -1.6%, matching the reading from Q1. It's amazing how so many analysis still don't have a #recession in their 2022 or even 2023 economic forecasts when it's likely the economy has spent all of 2022 in recession.

— Peter Schiff (@PeterSchiff) July 19, 2022

A recession would be very bad news for high-risk assets such as cryptocurrencies and tech stocks. So the bad news next week could effectively quash the current market sentiment and put an end to the crypto market rally.

Furthermore, the Federal Reserve is expected to increase rates by 75 basis points again next week. Interest rate rises are also bad news for crypto as they increase the cost of borrowing and encourage saving. This makes traditional bank accounts slightly more attractive and much safer than volatile cryptos for your average retail investor.

Bear Market Blues

These two factors alone could see the bears return in force, pushing crypto asset prices back to a new cycle bottom.

Earlier this week, on-chain analytics provider Glassnode reported that current market conditions have all the signals of having bottomed … apart from duration.

Using the Bitcoin (BTC) realized price metric, it calculated the average time the asset has spent below this in previous bear markets and compared it to the current. Bitcoin realized price is the value of all BTC in circulation at the price they last moved, or an approximation of what the entire market paid for their coins.

The average time spent below the realized price in a bear market is 197 days; this cycle has only seen 35 days below that level. Bitcoin was trading a little above its $21,934 realized price at $23,363 at the time of press.

There could be much more pain ahead if history rhymes and the macroeconomic storm strengthens.