Bitfinex Alpha | Yield Curve Points to Recession as Volatility Subsides in BTC Markets - Bitfinex blog
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Bitfinex Alpha | Yield Curve Points to Recession as Volatility Subsides in BTC Markets

The US economy continues to face concerns regarding a potential recession later in the year. A deeper yield curve inversion than any seen in the past 40 years suggests a prolonged and far-reaching recession than usual. Further interest rate hikes by the Fed in 2023 could make it difficult for companies to invest, leading to a decline in consumer spending and sentiment.

The impact of the Fed’s rate hikes is already being reflected in consumer behaviour, with the April Consumer Confidence Survey falling to a nine-month low, signalling a bleak outlook for the economy. Consumers are now taking a more pessimistic view of the economy, with spending plans decreasing for the next six months.

GDP growth in Q1 2023 was also lower than the consensus forecast, heightening concerns for an economic downturn amid a reduction in spending from businesses and challenges faced by consumers due to high inflation, rising interest rates, and banking problems. 

The Employment Cost Index, the broadest metric for US labour cost, is still growing rapidly. The case for further rate hikes is reinforced by a separate report on Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge. Personal spending in the United States slowed in March, which could be due to challenges faced by consumers from elevated prices and higher borrowing costs. Should personal spending in the US continue to reduce, the economy may be sustained by only personal income until it shifts to a widely anticipated recession.

In recent weeks, the cryptocurrency market has experienced a reduction in Bitcoin options volatility metrics and leverage, potentially leading to lower price volatility in the future. This reduction in the estimated leverage ratio (ELR) also implies that the spot market is becoming less sensitive to the derivatives market.

Bitcoin has seen an increase in dominance as a safe haven asset, outperforming gold, commodities, and the S&P 500. BTC has been outperforming other crypto assets as well. Trends in BTC and Ether Open Interest indicate increased investor confidence and speculation on the BTC price compared to traditional assets and crypto alternatives.

Ethereum’s deflation rate has also increased, leading to a rapid drop in supply and potentially boosting its price in the long term.

In the crypto-sphere, there have been several significant developments across the industry. 

In South Korea, Terra co-founder Daniel Shin and nine others have been charged by prosecutors, and assets worth $185 million have been sequestered. Genesis Global has requested a mediator for its bankruptcy proceedings following the withdrawal of a group of creditors from a preliminary agreement reached earlier this year. Celsius Network creditors have initiated legal proceedings against FTX.

Coinbase has made headlines by filing a lawsuit against the SEC, seeking a response to its rulemaking petition submitted last year.

In addition, a sharp one-day decline in Bitcoin’s price was attributed to a false alert sent by blockchain analytics company Arkham Intelligence, leading to over $211 million in liquidations for crypto market participants.

Finally, First Republic Bank’s future remains in the balance following a significant drop in deposits. The crisis in regional lenders in the US amid heightened regulatory scrutiny has made banks increasingly cautious of cryptocurrency clients, leaving crypto companies struggling to find banking partners.

In this environment, it pays to stay informed. Happy trading!