Written by: Hotcoin Research
introduction
On August 5, the cryptocurrency market experienced "Black Monday", the worst three-day sell-off in nearly a year. Bitcoin once fell to $49,000, and the cryptocurrency market plummeted 17%. Weak US non-farm payrolls data, the US dollar interest rate cut and the expectation of a Japanese yen interest rate hike were the direct triggers for this plunge. This market event not only reflects the high volatility of the cryptocurrency market, but also reveals its close correlation with macroeconomic indicators.
The value of cryptocurrencies is more determined by market supply and demand and investment trust. Cryptocurrency market fluctuations are closely related to macroeconomic indicators, especially US economic indicators. This article will reveal the influence of macroeconomics on the crypto market, explore the transmission mechanism between changes in US economic indicators and crypto market fluctuations, the relationship between recent crypto market fluctuations and macroeconomic indicators, and the analysis of macroeconomic outlook and crypto market trends, etc., to help investors understand the relationship between these economic indicators and the cryptocurrency market, better grasp market trends, and formulate effective investment strategies.
I. Overview of Macroeconomic Indicators
Macroeconomic indicators have a profound impact on financial markets and cryptocurrency markets by reflecting economic health and influencing the monetary policy of central banks. Understanding these indicators and their transmission mechanisms is an important basis for studying cryptocurrency market fluctuations.
1.1 Federal Reserve Base Rate
The Fed's benchmark interest rate refers to the federal funds rate, which is the overnight lending rate between commercial banks. The Fed regulates the benchmark interest rate through open market operations and by adjusting the discount rate and reserve ratio. The interest rate adjustment mechanism includes:
Raising interest rates: Reducing liquidity in the market by selling government securities, raising borrowing costs.
Rate cuts: Purchase of government securities increases liquidity in the market and reduces borrowing costs.
Adjustments to benchmark interest rates have a wide range of impacts on economic activities and financial markets. Interest rate hikes are usually used to curb inflation and reduce market liquidity, which may lead to a reduction in investment in high-risk assets such as cryptocurrencies. Interest rate cuts are aimed at stimulating economic growth, increasing market liquidity, and facilitating investment in high-risk assets.
1.2 Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures changes in the prices of goods and services paid by consumers and is the main inflation indicator. The CPI includes price changes in multiple categories such as food, housing, clothing, transportation, and medical care.
The rise in CPI indicates that inflationary pressure is increasing, which may cause the central bank to raise interest rates to control inflation and reduce market liquidity. Conversely, the decline in CPI indicates that inflationary pressure is easing and monetary policy may tend to be loose.
1.3 Producer Price Index (PPI)
The Producer Price Index (PPI) measures the changes in prices that producers receive when they sell goods and services. The PPI reflects price changes at the production stage and is considered an important indicator of inflation along with the Consumer Price Index (CPI). The PPI mainly consists of the following three parts:
Industrial Producer Price Index: reflects changes in the ex-factory prices of industrial enterprises' products.
Industrial Producer Purchaser Price Index: reflects changes in the prices of production materials purchased by industrial enterprises.
Service Producer Price Index: reflects price changes in the service industry.
An increase in PPI usually indicates future inflationary pressure, because the increase in production costs tends to be transmitted to consumer prices, causing CPI to rise. A high PPI may prompt the central bank to adopt a tight monetary policy, such as raising interest rates, to curb inflation. Conversely, a decline in PPI may indicate that inflationary pressure has eased and monetary policy may tend to be loose.
1.4 Purchasing Managers Index (PMI)
The Purchasing Managers' Index (PMI) is an important indicator of manufacturing and service industry activity, compiled from survey results of purchasing managers. The PMI includes five main components: new orders, production, employment, supplier delivery time and inventory. A PMI value greater than 50 indicates economic expansion, while a value less than 50 indicates economic contraction.
PMI is regarded as a leading indicator of economic health. An increase in PMI reflects the expansion of manufacturing or service industry activities, good economic health, increased investor confidence, and increased market liquidity. Conversely, a decrease in PMI indicates a slowdown in economic activity, which may lead to a decline in investor confidence and capital outflow from the market.
1.5 Labor Market Indicators
Non-farm payrolls: Non-farm payrolls reflect employment in all industries except agriculture and are an important indicator of labor market health. The data is usually released monthly and is surveyed by the U.S. Bureau of Labor Statistics (BLS).
Labor force participation rate: The labor force participation rate measures the proportion of the working-age population who have jobs or are actively looking for work. It is an important indicator of labor market vitality.
Wage growth: Wage growth reflects the tightness of the labor market and inflationary pressure. Rising wage levels will increase consumers' disposable income and promote consumption, but may also push up CPI and trigger inflationary pressure.
Unemployment rate: The unemployment rate is the proportion of the working-age population who are not employed but actively seeking work. A low unemployment rate generally indicates a prosperous economy, but it can also bring inflationary pressures.
The health of the labor market not only reflects the health of the economy, but also directly affects consumer spending and inflation expectations, which in turn affects macroeconomic policies. For example, low unemployment and high wage growth may prompt the central bank to raise interest rates to curb inflation.
1.6 Stock Market
As an important barometer of economic health, the stock market is extremely sensitive to changes in macroeconomic indicators. A rising stock market usually reflects economic growth and increased corporate profitability, while a falling market may indicate an economic recession and a decline in corporate profitability.
Investorsâ behavior in the stock market is also affected by macroeconomic indicators and policy changes. The sharp fluctuations in the stock market not only affect investor confidence, but also have a chain reaction on the cryptocurrency market.
1.7 Political and economic factors
Political and economic factors include international relations, regional conflicts, presidential elections, policy changes, etc. These factors can have a significant impact on the global economy and financial markets.
Political and economic changes often trigger market uncertainty and risk aversion, affecting the liquidity of financial markets. When political and economic risks increase, investors usually turn to safe assets such as gold and government bonds and reduce investment in high-risk assets.
2. Transmission Mechanism between US Economic Indicators and Cryptocurrency Market
The cryptocurrency market is particularly affected by changes in market sentiment and liquidity due to its high volatility and high risk. Compared with traditional safe-haven assets such as gold, cryptocurrency prices are more susceptible to the impact of macroeconomic indicators and policy changes.
Macroeconomic indicators have a significant impact on the cryptocurrency market mainly by affecting financial market liquidity and investor sentiment. The Federal Reserve's interest rate policy, bank deposit reserve ratios, labor market conditions, global economic instability, etc. are all important factors affecting capital inflows and price fluctuations in the cryptocurrency market. Understanding these transmission mechanisms can help investors and policymakers better cope with the high volatility and complexity of cryptocurrency markets.
2.1 Federal Reserve Interest Rate and Cryptocurrency Market
The Federal Reserve controls the money supply and market liquidity by adjusting the benchmark interest rate. When the Federal Reserve raises interest rates, borrowing costs rise, and the borrowing demand of enterprises and individuals decreases, which leads to a decrease in funds in the market and a decrease in financial market liquidity. Conversely, a rate cut reduces borrowing costs and increases liquidity in the market.
The cryptocurrency market is highly sensitive to changes in liquidity. When the Fed raises interest rates, liquidity decreases and investors are more inclined to withdraw from high-risk assets, such as cryptocurrencies, and turn to more stable investments, such as government bonds. This flow of funds usually causes cryptocurrency prices to fall. Conversely, when the Fed cuts interest rates, market liquidity increases and investors have more funds to invest in high-risk, high-return assets, such as cryptocurrencies, driving their prices up.
2.2 Bank Reserve Requirement Ratio and Cryptocurrency Market
The bank reserve ratio refers to the proportion of unloaned deposits that banks must keep. Increasing the reserve ratio reduces the amount of funds banks can use to lend, thereby reducing market liquidity. Reducing the reserve ratio increases banks' lending capacity and improves market liquidity.
Similar to interest rate policy, the adjustment of the deposit reserve ratio will also indirectly affect the cryptocurrency market by affecting market liquidity. When the deposit reserve ratio increases, market liquidity decreases, and the capital inflow into the cryptocurrency market decreases, leading to a price drop. On the contrary, lowering the deposit reserve ratio increases market liquidity, which is conducive to the inflow of funds into the cryptocurrency market and drives up prices.
2.3 Labor Market and Cryptocurrency Market
The health of the labor market, such as nonfarm payrolls, labor force participation rate and wage growth, directly affects consumer spending and economic growth expectations. When employment conditions are good and wage growth accelerates, consumer spending increases, the economy is active, and market liquidity is enhanced.
When employment is good or CPI shows rising inflation, the market expects the Fed to raise interest rates to curb inflation. This expectation is reflected in the financial market in advance, causing investors to adjust their portfolios and reduce investment in high-risk assets such as cryptocurrencies. On the contrary, when employment data is weak or CPI falls, the market expects the Fed to cut interest rates, increase market liquidity, and drive capital inflows into the cryptocurrency market.
2.4 Macroeconomic Instability and the Cryptocurrency Market
When expectations of a global recession increase or instability intensifies, investors' risk appetite decreases and they are more inclined to hold cash or invest in low-risk assets. At this time, market liquidity is usually negatively affected and investment in high-risk assets such as cryptocurrencies decreases.
As a high-risk asset, cryptocurrencies are often sold off by investors during periods of economic instability. Unlike safe-haven assets such as gold, cryptocurrencies lack stability and security, so when economic uncertainty increases, funds will flow out of the cryptocurrency market, causing prices to fall.
3. Analysis of the macro background of recent crypto market fluctuations
This week, the cryptocurrency market also plummeted amid a global market slump. After falling below $60,000, Bitcoin quickly dropped to below $49,000. Panic spread in the market, and the total market value of cryptocurrencies decreased by nearly 20% in 24 hours. This round of plunge is not just an isolated incident in the cryptocurrency market, but part of the turmoil in the global financial market, and the result of the combined effect of multiple macroeconomic factors.
3.1 Trigger: Weak US non-farm payrolls data
On August 2, 2024, the U.S. Bureau of Labor Statistics data showed that the U.S. non-farm payrolls data for July weakened across the board, triggering concerns about a U.S. recession: the number of new non-farm payrolls was only 114,000, far below the market expectation of 175,000; the unemployment rate rose to 4.3%, rising for four consecutive months; the average hourly wage increased by 3.6% year-on-year, falling below the critical level of 4% for two consecutive months. As a result, market sentiment took a sharp turn for the worse, and the global financial exchange market was shaken.
3.2 The end of arbitrage: US dollar rate cuts plus Japanese yen rate hike expectations
The U.S. Federal Reserve ended its two-day monetary policy meeting on July 31 and announced that it would maintain the target range of the federal funds rate at 5.25% to 5.5%. The Fed also said that if the fight against inflation continues to make the desired progress, the Fed may announce a rate cut at its meeting in September this year. On the same day, the Bank of Japan raised its policy rate from 0% to 0.1% to around 0.25%, the first rate hike since Japan ended its negative interest rate policy in March this year. This policy change formed a sharp contrast, causing carry traders to have to sell U.S. dollar assets to repay yen loans.
Before the announcement, the crypto market was still enjoying the Trump rally. After the announcement, Bitcoin began to fall all the way, and plummeted on August 5.
3.3 Selling Panic: Interpretation of Jump Trading and Buffettâs Market Operations
In early August, Jump Crypto, the crypto arm of Jump Trading, transferred a large amount of Ethereum and USDT, sparking market speculation that it would withdraw from the crypto business. This large transfer event caused market panic, and investors followed suit and sold, exacerbating the downward pressure on the market.
Well-known investor Warren Buffett sold a large amount of Apple shares in the second quarter and held a record cash reserve. This operation was interpreted by the market as pessimism about the future market, further undermining investor confidence.
3.4 Chain reaction: a general decline in global financial markets
On August 5, Japan's Nikkei index recorded its biggest drop since 1987, and South Korea's Kospi and Kosdaq indexes both fell by more than 8%, triggering the circuit breaker mechanism. The market value of the US stock market evaporated by $1.4 trillion, and the Nasdaq 100 index futures fell by more than 5%.
The decline in global stock markets reflects investors' concerns about economic recession and rising risk aversion. The cryptocurrency market has not been spared, and due to its high-risk attributes, it has become the preferred target for capital withdrawal and risk aversion operations. Investors have sold off crypto assets, causing prices to fall sharply.
In addition, concerns about escalating tensions in the Middle East and uncertainty in the US election have also led to an increase in investors' risk aversion, putting pressure on risky assets such as Bitcoin and fueling volatility in the crypto market.
4. Future Economic Outlook and Crypto Market Trend Analysis
In the second half of 2024, the global economy still faces many challenges and uncertainties. The interweaving of various factors will jointly determine the direction of the crypto market in the second half of 2024.
4.1 Global economic growth slows down
The latest forecasts from the International Monetary Fund (IMF) and the World Bank show that global economic growth is likely to slow down. The main reasons include inflationary pressure, geopolitical tensions and supply chain disruptions. Although the economic recovery momentum in some regions is strong, the risk of overall slowdown in growth remains.
4.2 Expectations of Fed rate cuts
The market generally expects the Federal Reserve to cut interest rates at least twice in the second half of 2024, a total of 75 basis points, to cope with the pressure of slowing economic growth. The Fed's expected rate cuts will increase market liquidity and promote investment in high-risk assets. The increased liquidity will help drive up cryptocurrency prices while increasing market participants' willingness to invest.
4.3 Employment Data and Economic Policy
The health of the labor market directly affects investor confidence and economic policies. Although the U.S. employment data fell short of expectations, it has not yet shown clear signs of a recession. If the employment data deteriorates further in the coming months, it may prompt the Federal Reserve to adopt a more relaxed monetary policy, which will increase market liquidity and support the cryptocurrency market.
4.4 Approval of Bitcoin and Ethereum Spot ETFs
The approval and listing of Bitcoin and Ethereum spot ETFs have injected new momentum into the entire crypto ecosystem. Recently, global wealth management giant Morgan Stanley announced that it will allow financial advisors to recommend Bitcoin exchange-traded funds (ETFs) to eligible clients. The convenience and legality of ETFs make it easier for more institutional investors and retail investors to participate in the cryptocurrency market.
4.5 Impact of the US presidential election
The dynamics of the US presidential election will have a significant impact on market sentiment and the cryptocurrency market. The policies of different candidates vary greatly, and their stances on crypto assets will directly affect market trends. As the election approaches, market volatility may increase.
4.6 Regulatory and policy environment of the cryptocurrency market
The regulatory and policy environment of the cryptocurrency market is constantly changing. The attitudes and policies of governments and regulators towards cryptocurrencies will have a significant impact on the market. Strengthened regulation may improve market transparency and security, but it may also limit market growth and innovation. Investors need to pay attention to policy developments around the world, especially policy changes in major economies such as the United States and China.
4.7 Geopolitical tensions
Geopolitical conflicts such as the Middle East situation, the Russian-Ukrainian war, and instability in other regions may have a negative impact on the global economy and the crypto market. When geopolitical risks increase, investors usually turn to safer assets such as gold and the US dollar, which may lead to capital outflows and price declines in the cryptocurrency market.
In conclusion, despite facing many uncertainties, the cryptocurrency market still has great potential for development. Technological innovation, market demand and improved institutional environment all provide new growth opportunities for the market. However, investors need to be alert to the high volatility and potential risks of the market, allocate assets rationally and avoid excessive speculation.
