Crypto and stock prices have surged this year, driven by strong earnings and central banks lowering interest rates.
Bitcoin
btc0.85%Bitcoin reached a record high of nearly $105,000, while the total cryptocurrency market cap increased by 120%. U.S. stock indices like the Nasdaq 100, Dow Jones, and S&P 500 have also risen by over 20%.
Analysts are optimistic about continued growth in these assets. Oppenheimer, for instance, predicted the S&P 500 to rise from its current level of around 6,070 to 7,100, citing robust fundamentals
Similarly, Matt Hougan, Chief Investment Officer at Bitwise, estimated that Bitcoin price could eventually reach $3 million, driven by corporate and government adoption of Bitcoin as a reserve asset.
Mark Zandi explains why crypto and stocks may crash in 2025
Mark Zandi, Chief Economist at Moody’s, cautioned that both stocks and crypto are significantly overvalued. He attributes their current stability to the absence of a major bearish catalyst.
I’ve argued that most asset markets appear overvalued, bordering on frothy. Stocks, corporate bonds, single family housing, crypto and gold, quickly come to mind. But what could be the catalyst for them to selloff? How about a meaningful correction in the Treasury bond market.
— Mark Zandi (@Markzandi) December 8, 2024
The catalyst, in his view, will come from the Treasuries market, which has expanded dramatically in the past few years. In the U.S., public debt has jumped to over $36.2 trillion and is growing by $1 trillion every four months.
Zandi believes that the bond market will become highly volatile in 2025 as the Federal Reserve exits quantitative tightening. At the same time, China is no longer buying U.S. bonds, while Japan is starting to reduce its purchases.
As such, he expects hedge funds that are buying these bonds to exit en masse when signs of problems emerge. At the same time, U.S. deficits are expected to keep rising under Trump.
Therefore, Zandi expects that bond yields will soar, leading to a rotation from overvalued assets like stocks and crypto.
Recent history shows that cryptocurrencies and stocks often drop when bond yields are rising. A good example is what happened in 2022 when the 10-year bond yield jumped from 1.33% to 4.3% as the Fed hiked rates to combat elevated inflation.
Bitcoin crashed by 64% in that year, while the S&P 500 and Dow Jones fell by 19% and 8.8%, respectively. These assets have rallied this year as bond yields fell as the Fed started cutting interest rates.