Crypto: The Surprising Beneficiary of Economic Downturns

by Juan Villaverde & Alex Benfield
By Juan Villaverde & Alex Benfield

In the complex world of investing, there exists a stubborn myth that a weakening economy inevitably signals the fall of asset prices.

Forgive my smirk, but this viewpoint is at best an oversimplification. At worst, an outright fallacy.

Now, allow me to introduce the unsung hero of this tale: global liquidity. This seemingly unassuming factor serves as the linchpin connecting the economy and asset prices.

If you'd kindly hop into our time machine and set the dial to 2008, you'll see a pattern that has repeated throughout the roller coaster of monetary experiments since.

But let’s look at a more recent example by making a pit stop in the fall of 2022 — a time when the economic landscape looked as inviting as a battlefield.

At that time, consumer prices were skyrocketing due to post-COVID supply chain disruptions, reaching 30-year highs. Meanwhile, the Fed was hiking up interest rates faster than a seasoned mountaineer. On top of that, global trade was choked by Ukraine war sanctions. The U.S. economy? Two straight quarters of negative GDP growth. You guessed it, that’s a telltale sign of the big “R” word: recession.

And it wasn't just the U.S.; other major economies were also singing the blues.

Across the pond, European Union banks showed a clear peak in credit indicators, and the U.K. gilt market was cracking. Meanwhile, China was wrestling with economic strain thanks to its zero-COVID policies.

Amid this symphony of economic woe, something intriguing happened: The balance sheets of the world's five largest central banks — our trusty yardstick of global liquidity — shrugged off months of shrinkage and began to plump up.

In an unexpected plot twist, a liquidity surge swooped in, buoying all asset classes. Gold, bonds, stocks and our digital darling, crypto, all found their cycle lows during this period.

Contrary to what might feel instinctive, a sluggish global economy can be a boon for asset prices — especially crypto. Not just a one-off quirk, this "bad economy, good liquidity" relationship has been pulling a repeat performance for years.

As per the comprehensive work by Global Macro Investor, the dance between these two variables has been going on for quite some time.

In fact, over the past decade, the year-on-year change in global liquidity and global economic growth have been shadowing each other rather closely.

Fast forward to the present, and we are seeing an encore performance. The Institute for Supply Management Index is signaling economic contraction. American banks are floundering, bankruptcies are having a field day and affordable housing is as rare as hen's teeth.

However, if we follow the breadcrumbs of the economy-liquidity-asset prices relationship, these developments could point to a bullish future for asset prices. The crystal ball suggests this trend will hold sway into late 2024, maybe even beyond.

Since the liquidity cycle hit rock bottom last October, bonds are 8% perkier, stocks have seen a 17% uptick, gold has rallied by 20% and crypto has bolted ahead with a more than 50% surge.

As global liquidity looks set to increase over the next few years, the sage advice would be to back the fastest horse. And at present, that horse is crypto.

Now, I’ll give the stage to Alex so we can see how the rest of 2023 could play out for crypto.

Is Crypto Preparing for a Rally?

Although we predicted earlier that the second half of 2023 could be rocky, it seems the situation has changed.

On Wednesday, I delved deeper into this topic and outlined three reasons why crypto could possibly be on the brink of a rally.

Namely, we have started to see some signs that markets might receive an early summer adrenaline shot, and the S&P 500 looks to be an early indicator of that. When we factor in this recent liquidity boost, we start to see a rosier picture — especially for cryptocurrencies.

Still, as of now, crypto prices remain rangebound and have not broken through some of the important indicators we have been monitoring.

However, they are fast approaching the moment of decision, as we have noted converging trend lines on Bitcoin’s (BTC, "A-") chart. Although we expect something to give way here this month, we are still not entirely sure which direction crypto prices will gravitate toward.

Since our crypto market leaders look like they might have bottomed out in late May, we have been waiting for a rally in their prices.

If there is any juice left to squeeze, we will need to see Bitcoin reclaim $30,000. From there, if Bitcoin can manage to break through its previous high of $31,000, then it could materialize a run to $40,000.

However, if BTC fails to garner any positive momentum and prices fall, we will be looking at the $25,000 price level to offer some support. Should that fail, then $21,000 would be the last bit of support before BTC retests that important $20,000 level.

Source: Coinbase Global (COIN).
Click here to see full-sized image.


Now, Ethereum (ETH, “B”) is in a slightly better position, as it has broken above its most recent downtrend.

However, it hasn’t rallied with any conviction, so it’s difficult for us to get too bullish on that breakout before Bitcoin can surpass its own downtrend.

That said, we would like to see ETH test the $2,000 resistance level once again. Should ETH reclaim $2,000, it could take another shot at its yearly high-water mark of $2,150.

If ETH can break above its yearly high, then the next real target would be $2,500. But we will have to remain patient to see whether the bulls can build up any momentum.

Source: Coinbase.
Click here to see full-sized image.


As we stand on the brink of potential market change, it's as if we are watching a high-stakes chess game.

The pieces on the board — economic indicators, global liquidity, asset prices and specific cryptocurrencies like BTC and ETH — are poised, ready for the next move.

Yet, just like in chess, the outcome is uncertain. We have our strategies and we've analyzed the board, but the game unfolds in its own time.

As the coming weeks are likely to offer more clarity, our current stance requires patience and observation.

Whether Bitcoin reclaims its position at $31,000 and beyond — or Ethereum challenges its previous high of $2,150 — these market movements are akin to the calculated moves in a chess game.

So, like seasoned chess players, we must wait, observe and prepare for the next move. The board is set, the pieces are moving and as we've seen before, the game of markets is rarely won by the impatient.

As we prepare for the next phase of the match, we look forward to the unfolding of the strategies we've discussed, hoping for a triumphant checkmate in the form of a healthy, bullish market.


Juan & Alex

About the Editor

When econometrician and pro trader Juan M. Villaverde first applied his algorithms to Bitcoin years ago, he discovered a regular cyclical pattern. And he has since used it to build the world’s first crypto timing model based on cycles. Thanks to his analysis, the Weiss Ratings team has accurately picked the top and bottom of major crypto booms and busts.

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