Bitcoin Breakout Suggests Crypto Bear Market May Have Ended

Economic Data Boosts Stock Markets, and Bitcoin and Crypto

Any discussion of the cryptocurrency market and its behavior at the moment isn’t complete without a parallel discussion of the stock market, since crypto has indeed been taking its cue from equity markets this year. In fact, data revealed that bitcoin’s correlation with the S&P 500 and Nasdaq reached 0.59 and 0.82 (respectively) in May, close to an all-time high. So just as both of these indexes have fallen in 2022, so too has bitcoin and other cryptocurrencies with it.

Put differently, the forces dragging down stock markets have also been dragging down crypto, with US markets down by anything between 14.5% and 27% in the year to date, largely as a result of war in Ukraine, inflation and interest rate hikes. Conversely, the positive economic news that has filtered out in the past couple of weeks has helped to resuscitate stock markets and, by extension, crypto.

For instance, the Nasdaq (which tracks tech stocks) rose for five consecutive days in early July as a result of better-than-expected jobs data coming out of the United States. The US added 372,000 jobs in June, indicating that the economy is growing despite recession fears, an impression reinforced by a round of strong earnings reports.

It’s also an impression strengthened in other parts of the world: the UK economy grew by 0.5% in May according to figures released a week ago; the EU economy witnessed 0.6% in Q1 2022, despite the Ukraine war; the Brazilian economic ministry raised its 2022 growth forecast to 2% last week; and recently revised estimates suggest that India enjoyed 14-15% growth in Q1 2022.

Could the Market Dodge a Recession?

Admittedly, the picture is still mixed and tentative, but such emerging data hints that the global economy may have turned a corner. More specifically, the data hints that the predicted recession may not actually arrive, or may not be as harsh as previously feared.

This suspicion is heightened by the fact that oil prices have actually begun falling in recent weeks, with barrels of Brent crude dropping by 5% last week, to around $95. This is below the level at which its price closed on the first day of Russia’s incursion into Ukraine, February 23. At one point, prices rose to $130, so Brent’s climbdown to around $95 once again suggests that things aren’t quite as bad as once thought.

Again, more evidence can be found to support this hope, with the United Nations Food Prices Index showing that global prices for foodstuffs declined by 2.3% in June compared to May. Yes, prices remain higher overall than they were a year ago, but the slowdown and reversal in recent rises suggests the worst may be over.

Such turnarounds have been reflected in stock market levels, with the three main US indices (the S&P, Dow and Nasdaq) all up by 5% in the past month. This modest warming in sentiment has also carried over into the cryptocurrency markets, as witnessed with bitcoin reaching a one month-high of $22,829 on Monday July 19.

Remaining Uncertainty

Combined with technical indicators, which all say crypto has already hit its bottom, these fundamentals certainly point to a better future. That said, the economy remains in a very precarious state, with the ongoing conflict in Ukraine — as well as the lingering (after)effects of the Covid-19 pandemic — liable to reverse any promising developments.

For instance, much of the recent turnaround stems from revised expectations of what the Federal Reserve will do with rate hikes. At the moment, analysts are expecting the Fed to hike rates by 0.75% when it makes its new announcement next week. They had previously expected 1%, with this softening of fears helping to push the stock and cryptocurrency markets higher. However, if the Fed actually does end up raising its base rate by a full percentage point (or by more), any renewed optimism and hope could be wiped out quickly.

Still, recent data shows that much of the global economy is still actually growing (if only more slowly than usual in places such as China, Singapore and Japan). Given the challenges it currently faces, things could improve considerably if these challenges — most notably the Ukraine-Russia conflict — were soon resolved. On the other hand, they could continue for quite a while longer, which is why the cryptocurrency market has been at a bottom for numerous weeks without moving substantially upwards.

For retail traders, what this means is that most will probably be better off paying more attention to macroeconomic data (and US stock markets) than to what’s going on with any particular cryptocurrency. Because it’s ultimately a lift in such data that will turn crypto’s bear market into a new bull market.