Echo bubble or new all-time-highs?
It’s been four boring months in crypto and as a result I haven’t written a new Crypto Newsletter for a long time. Bitcoin has been fluctuating in a range between $25k and $32k for the past 200 days. All while traditional markets have been performing quite well.
Following Bitcoin's recent surge to $28k, optimism seems to be making a comeback. But is that justified? Is Bitcoin on its way to $40k, as I predicted in my previous newsletter? Or should we be cautious, given the increasing likelihood of a US recession?
Recession Concerns
Will a recession hit the US or not? It’s a question that many economists ask themselves. And the opinions are divided. Despite interest rates rising at a record pace for a year and a half, the stock market is performing well. In early August, the S&P500 and Nasdaq were only 4.5% below their all-time highs. This is surprising given that all indicators seem to point to an impending recession.
One of the key indicators that is used to predict recessions is the inverted yield curve. This phenomenon occurs when the interest rate on short-term bonds is higher than that on long-term bonds.
So far, this indicator has had a 100% strike rate in predicting recessions. Since 1955, each inverted yield curve has always led to a recession within two years of the moment the curve inverted.
As you can see in the image below, currently the yield curve has already been inverted for 15 months. If history repeats itself, a recession seems almost inevitable.
And despite the substantial gains in the Nasdaq and S&P500 over the past few months, both indices only made a "lower high." Not necessarily a good sign.
Moreover, both charts are probably giving the average Bitcoiner a flashback to 2017. The lower high is reminiscent of the "complacency" phase of a typical bubble (see image).
This doesn't necessarily mean that the stock markets will plummet by 80%. The Federal Reserve will probably do everything in its power to prevent a total collapse similar to the Great Depression from happening. And with interest rates at high levels and the money printer turned off, they have quite some room to stimulate the economy.
However, I don't support the expectation of some economists that a total recession can be avoided. The stock markets don't look too promising, and according to the inverted yield curve - which, I'll stress again, has never been wrong - the US will enter a recession within a maximum of 9 months.
Impact on Bitcoin
What does such a recession mean for Bitcoin? In the short term, I don't think much good. It became abundantly clear in 2022 that Bitcoin is not immune to a crash in the stock market.
Additionally, the current Bitcoin chart reminds me a bit too much of the chart in March 2022.
The possibility of Bitcoin forming an echo bubble (a smaller bubble that occurs after the burst of a larger bubble), as predicted by the notorious crypto trader GCR last year, is still an option. The price movement of Bitcoin in 2023 at least seems to be a significant reflection (echo) of the larger bubble.
Whereas four months ago, I believed Bitcoin would drop to $25k one more time before continuing its path to $40k, I'm less certain about that now. A recession in the US is looming, which also makes me more cautious in the crypto market.
However, in the long term, I remain very optimistic. If the FED starts printing money again to print the US out of a recession, I believe Bitcoin will be one of the first to benefit. A crypto bull market has always been accompanied by an increase in the global money supply (see image below).
So, in the coming period I will remain cautious and focus on expanding my Bitcoin portfolio for the long term. Good luck and speak soon!