Three important events in the past two weeks caused significant trend shifts in the crypto market. Those are FOMC decisions for Feb, unexpected strong employment in Jan, 2yr vs 10yr treasury yield spread inverted leading to pessimistic expectation on recession, combined with SEC enforcement in crypto, which all resulted in volatility of crypto market. Following are analyzed for each:
1. Feb FOMC rate decisions
Feb 1st, Fed released rate decisions for Feb’s FOMC, increasing rate by 25bps to 4.5%-4.75% unexpectedly, signaled it was on track to do so again at its meeting next month and warned not to speculate regarding a rate pause. Investors welcomed the decision, all three indexes ending the day in positive territory. Nasdaq closed up 2%, while bitcoin rallied 2.62% on the same day.
2. Job growth accelerated in Jan, unexpectedly strong
U.S. job growth accelerated at the start of the year as employers added a robust 517,000 jobs and pushed the unemployment rate to a 53-year low. The unexpectedly strong hiring gains raise means higher servicing cost for CPI. Given other factors on CPI, shelters and motors picking up in both deals and prices, retailers making new purchases for restock, CPI is most likely to remain sticky, which will prompt a more aggressive response by Fed to tame the inflation.
3. 2yr vs 10yr treasury yield spread inverted, combined SEC enforcement in crypto market
On February 9th the yield curve on the US two-year and benchmark 10-year Treasury notes inverted at its worst since 1981, raising the alarm of a recession in the next year or so. At the same time, the Fed continued its hawkish rhetoric to maintain rates higher for longer. The rising risk of a hard landing combined with the continued hawkish strategy of raising interest rates has spooked markets. On the same day, the three major US stock indexes opened lower, falling for the second day in a row. The decline in U.S. stocks led to cautious for risky assets. Below is the spread between 10yr and 2yr yields, and the shaded area indicates recession. As you can see, each time the yield spread narrowed down to inverted, there was a recession. That is why inverted yields have become one of the most important indicators for predicting recessions.
On the same day, SEC announced charges against crypto exchange Kraken on Thursday, alleging its offering of a crypto staking-as-a-service program amounted to offering unregistered securities products in the U.S. To settle the charges, Kraken is paying $30 million and shutting all of its U.S. staking services. The rumors of US regual spread, such as banning on retailers purchasing crypto. Although regulators haven’t clarified, the rumors will become the shorts’ weapon to affect market. Since the beginning of Yr 23, bitcoin rebounced from $16,531 to highest $24,262 (+46.75%), boosting crypto market cap over 1 trillion USD. Some altcoins also suprised market, like APT, Matic, OP, GRT etc. After several days rising, bitcoin and cryptos shock around, when longs realized profits. The on-chain data also shows quantitative stable coins flows out from exchange platform.
To sum up, lack of substantial positive events, uncertainty of risky assets represented by US equities, more enforcement in cryptos from regulators, and technical trends are yet to be confirmed, investors need to be highly alert to changes in market risk appetite. To protect profits and lower positing size will be better compared to holding. Be patient to make decisions until relatively stable.