Author: Michael Nadeau, The DeFi Report; Translated by: Wuzhu, Golden Finance
We’ve said it many times: if you don’t understand macroeconomic trends, you don’t understand crypto. Of course, this is also true for on-chain data.
This week, we’ll explore how macroeconomic trends will impact the cryptocurrency market in 2025.
inflation
Inflation data is rising. After bottoming out at 1% in September, we have accelerated back to over 3% on a Truflation basis.
Data: Truflation
We like Truflation’s data because it uses real-time web-scraped data from a variety of online sources. Additionally, it is updated more frequently than traditional government indicators such as the PCE.
However. The Fed’s focus is on PCE. Therefore, we use PCE as a way to predict Fed policy and Truflation to get a more real-time view of the economy.
This is personal consumption expenditure:
Data: FRED database
Currently at 2.3% (October data). Also rising – which is hard to see in the chart (September was 2.1%). We will get November data on December 20th.
Views on inflation
Energy costs and housing costs are the main drivers of growth. However, crude oil prices are at cycle lows.
Data: Trading Economics
The question is whether they will stay here, or potentially decline further.
Given the seasonality effects + Trump's plans to increase supply via US deregulation, it's hard to see why oil prices will surge anytime soon.
On the other hand, geopolitical conflicts, unforeseen natural disasters, or OPEC production cuts in anticipation of increased U.S. supply could cause oil prices to rise.
We have not seen these events happen yet.
Furthermore, our position is that inflation so far in the 21st century has been primarily caused by supply shocks + fiscal spending and stimulus checks - we do not view this as a threat today.
As a result, we expect oil prices to remain range-bound and inflation/growth to decline.
Dollar
Data: Trading View
Bitcoin has risen 58% since October 1. During the same period, the U.S. dollar index rose from 100 to nearly 108. Today’s ranking is 107.
This is peculiar behavior. Normally, a stronger dollar is bad for risk assets like Bitcoin (see 2022). But we are now seeing a strong correlation between the two.
So what is going on and should we be worried?
We believe that the dollar is showing strength as global markets price in a Trump win. Trump’s policies are good for business. That means they are good for the market.
We saw the same dynamic after Trump’s victory in 2016. The dollar rose. Why? We think foreigners were pricing in the “Trump pump” and buying dollar-denominated assets as a result.
Views on the US dollar
We think growth is slowing/normalizing. This is bringing inflation down, albeit with a delay. Rates are likely to fall.
Therefore, we expect the USD to remain range-bound in the medium term, possibly falling back towards 100.
ISM data (business cycle)
Data: MacroMicro
Looking at the economic cycle, we can see that the blue line (manufacturing) appears to be bottoming out. Historically, readings below 50 indicate an economic contraction. Sustained readings below 50 indicate an economic slowdown.
That’s where we are now – the service (red line) is doing a little better.
These levels tend to coincide with rising unemployment, which typically leads to looser monetary policy from the Federal Reserve.
Again. That's exactly what we're seeing today.
Views on the economic cycle
We think growth is slowing, leading to higher unemployment. This could eventually manifest itself as downward pressure on inflation.
This led to rate cuts. This put downward pressure on the dollar.
In the medium term, we believe these dynamics should support risk assets/cryptocurrencies.
Credit Market
Data: FRED
Credit spreads continue to be historically low, suggesting that investors demand low compensation for an additional unit of risk.
This could mean two things: 1) the market is complacent and risk is mispriced, or 2) market participants are optimistic about the economy and the Fed and fiscal policy are accommodative.
We think it's the latter.
Next, let’s look at trends in bank lending.
Data: Fred Database
The percentage of banks tightening their lending standards has been falling since its peak at the end of 2013. Ideally, this KPI will remain stable as the Fed cuts interest rates.
That being said, historically we have seen a negative correlation between interest rate cuts and the percentage of banks tightening their lending standards. Why? Rate cuts tend to herald an economic slowdown or recession – making it harder for banks to lend.
Views on the credit market
There are no signs of stress. At least not yet.
Labor Market
The unemployment rate rose to 4.2% in November (from 4.1%). Below we can see the recent rise in unemployment claims.
Data: Forex Factory
We believe the slack in the labor market has the full attention of the Fed right now. The continued rise in unemployment claims tells us that for those who are out of work, it is becoming increasingly difficult to find a job.
This is another sign of slowing/normalizing growth. That being said, the stock market is still at all-time highs. Corporate profits are strong. That's what keeps the labor market intact.
But my sense is that the Fed is watching this like a hawk. After all, the Sam rule was triggered in July.
Views on the labor market
It is softening. But not fast. We expect the Fed to (try to) get ahead of weaker data (as they already cut rates by 50bps in September after the July SAM data).
Treasury and fiscal expenditure
Data: U.S. Treasury Department
The U.S. government has spent $1.83 trillion more this year than it has taken in in taxes. In November alone, it spent more than twice as much as it took in.
The $1.83 trillion that has been printed and pushed into the economy/Americans’ hands has been the primary driver of financial markets this year (and, we believe, inflation).
Now. Trump is coming. We also have a new agency called “DOGE,” the Department of Government Efficiency, headed by Elon Musk.
Some think that excessive spending will be reduced as a result. Perhaps. But where will the cuts come from? Medicare/Social Security? The military? Interests?
That’s 65% of the budget – which seems untouchable.
Meanwhile, the Treasury must refinance more than a third of its debt next year. We don’t think they can do that by raising rates.
Views on Treasury/Fiscal Spending
We think it’s unlikely that there will be a big cut in fiscal spending in the short term. DOGE could probably cut spending by $10 billion. But it won’t change the status quo in a material way. It’s going to take some time.
Meanwhile, the Treasury needs to refinance 1/3 of all outstanding debt next year. We think they will do this at lower rates.
Combining these views, we are optimistic about the outlook for risk assets/cryptocurrencies.
Federal Reserve Policy
The next FOMC meeting is on December 18th, with the market currently pricing in a 97% chance of a rate cut. We think this could also be a green light for easing in China.
Why?
We think China wants to continue easing policy. But it is difficult for them to cut rates when the Fed does not cut rates because the yuan will depreciate against the dollar, making Chinese imports more expensive.
Views on Fed policy
A rate hike in the near term seems unlikely. A rate cut in December is almost certain, with markets pricing a pause at 76% in January. There is no FOMC meeting in February.
As a result, the next policy decision will not be made until March. We believe that the labor market is now likely to show more signs of slack, and the Fed is likely to cut interest rates further in mid-to-late 2025 - ultimately by around 3.5%.
Will rate cuts increase inflation? We don’t think so – it’s a non-consensus view. In fact, we think rate hikes are causing inflation (and other fiscal spending) to rise.
Why?
Because interest payments are now over $1 trillion. This money is printed and passed on to Americans holding bonds, and it appears that this money is being invested in the economy. Of course, rising interest rates have not caused banks to stop lending (see chart above).
Therefore, we think that as the Fed cuts rates, inflation will likely fall (assuming oil prices remain low and we don't see further increases in fiscal spending). Remember, we had 10 years of zero interest rates with low inflation. Japan had 0% interest rates for 30 years with low inflation.
Trump policies
Markets know what to expect from a Trump presidency:
Lower taxes. This should boost corporate profits and could lead to higher stock prices. It could also lead to greater income inequality and larger deficits. More deficits = more dollars in the hands of Americans.
Tariffs/"America First". This could lead to higher domestic prices. We think AI/automation may actually offset this to some extent.
Deregulation. This is good for business because it could lead to higher profits in the energy, technology and financial sectors.
Stronger borders. This could lead to labor shortages and higher wages (inflation).
Views on Trump's policies
We think Trump is generally good for business, free markets, and asset prices. The trade-off is that we may see some inflationary impulses. That’s where things get interesting because if inflation returns, the Fed will look to pause rate hikes or tighten monetary policy.
Of course, we think Trump will try to impose his will on Jerome Powell. Ultimately, we think Trump wants to boost the economy and inflate away some of the debt over the next four years. This means inflation must exceed nominal interest rates, which is not the case today.
Finally, given Trump’s support for the digital asset industry (and the incoming SEC chairman), we believe cryptocurrencies will benefit from his administration.
Not to mention the potential for favorable legislation from Congress in the coming years and the potential for a strategic reserve of Bitcoin.
Views on Trump's policies
We believe that a Trump administration would be favorable for cryptocurrencies from both a market and regulatory perspective.
China
Dan Tapiero (one of my favorite macro investors) says China is currently experiencing deflation (negative real interest rates).
Negative interest rates in China dampen inflation fears in the U.S. This strengthens the dollar (as we are seeing today).
A rate cut in the United States could lead to a rate cut in China as well.
Ultimately, it will lead to more global liquidity.
Speaking of global liquidity.
Global liquidity
With 1/3 of US debt needing to be refinanced next year, we think the Fed may have to step in as a buyer of last resort (QE).
Lower U.S. interest rates would allow China and Europe to ease conditions in some coordinated way.
We believe this will lead to ample liquidity/collateral within financial markets - with crypto/risk assets being one of the biggest beneficiaries.
These dynamics are consistent with the fourth year of the crypto cycle — the most volatile upcycle in history.
Summarize
Growth is slowing.
This is causing turmoil in the labor market (something the Fed is watching).
This leads to rate cuts (as we are seeing today).
This allows China and Europe to ease conditions without sacrificing currency/imports.
This has led to favourable liquidity conditions for risky assets.
This is the future we see.
Factor in fiscal spending, the incoming Trump administration, and the fourth year of the cryptocurrency cycle, and you can predict explosive bull market conditions in 2025 (expect volatility).
Of course, we will continue to monitor the market and provide you with the latest information from an on-chain data + macroeconomic perspective.
After all, if you don’t understand the macroeconomic situation, you don’t understand your cryptocurrency.