Global macroeconomic turmoil presents a good opportunity for allocation in the crypto market

In February, the global economic landscape, especially the macro financial environment in the United States, underwent a dramatic transformation.

US inflation data rises, consumer confidence falls to a 15-month low, raising concerns in the market about a recession in the US economy. This has prompted traders to start repricing for recession expectations, leading to a rapid decline of the three major US stock indexes near the 120-day moving average.

In this case, funds began to seek refuge. The yield on the 10-year U.S. Treasury bond rapidly fell, and the gold market also showed signs of peaking.

Affected by the trends in the US stock market, Bitcoin experienced a significant decline in the last week of February, marking the largest drawdown and the biggest weekly loss of this cycle.

Analysis suggests that this round of market activity is essentially a reversal of the previous "Trump trade" pricing. Considering the self-adjustment capacity of U.S. policies and the medium to long-term development prospects of the crypto market, this may be a good time for medium to long-term investment in Bitcoin. It is recommended to adopt a gradual accumulation strategy based on caution.

Macroeconomics: Economic recession expectations trigger market downturn

The economic and employment data released by the U.S. government in February, along with the chaos caused by Trump's tariff policies, have become the two core factors influencing the trends of macro finance and the crypto market recently.

The core employment data released on February 7 showed that the seasonally adjusted non-farm payroll in January was only 143,000, far below the expected 170,000. The unemployment rate was 4%, slightly lower than the expected 4.1%. The significant decrease in employment has intensified market concerns about a recession in the U.S. economy.

The CPI data released on February 12 showed that the January CPI monthly rate reached 0.5%, far exceeding the expected 0.3% and also higher than December's 0.4% last year. This pushed the annual rate to exceed the expected 2.9%, reaching 3%. The inflation rebound for three consecutive months has made the market believe that the Federal Reserve has ample reason to delay interest rate cuts. Even if signs of economic recession appear, it is difficult to change the Federal Reserve's decision.

On February 21, the University of Michigan announced that the final value of the U.S. Consumer Confidence Index for February was 64.7, down from the preliminary value of 67.8, marking a 15-month low. Continued low consumer confidence will inevitably affect business confidence.

These negative data compounded, ultimately undermining market confidence. On that day, the three major U.S. stock indices all experienced significant declines.

After two consecutive years of significant gains, the US stock market continued to plummet in the week following the 21st (Friday), erasing all gains made this month and continuing to decline. The Nasdaq fell 3.97% for the month, the Dow Jones dropped 1.58%, the S&P 500 decreased by 1.42%, and the Russell 2000 index fell sharply by 5.45%. Both the Nasdaq and the S&P 500 fell below the 120-day moving average.

For traders, the persistent rebound in inflation and the potential deterioration of employment conditions may cast a shadow of "recession" again, making it possibly the best choice to reduce long positions.

In addition to the deterioration of economic and employment data, Trump's flip-flopping on tariff policy has also left the market feeling confused and pessimistic.

In January, Trump signed a memorandum on the "America First Trade Policy" and announced tariffs on goods from multiple countries. The market initially viewed Trump's tariff policy as a tool for political negotiation, but it is now about to be implemented and is starting to drive up inflation. This may exceed market expectations and exacerbate traders' pessimism.

The only factor that could positively impact inflation and interest rate cuts, the "Russia-Ukraine negotiations," made good progress for most of February. However, at the end of the month, a dramatic conflict occurred between the two presidents at a White House press conference, leading to the collapse of the mineral agreement that was supposed to be signed. European leaders have expressed support for Ukraine, and the differences between the U.S. and Europe may deepen further. The "Russia-Ukraine War," which was originally expected to end, has encountered new variables, making it difficult to conclude in the short term. This has dampened expectations of reducing inflation through increased oil production by ending the war.

Since November last year, the "Trump trade" has been built on expectations of strong economic growth. Now, with weak employment data, persistently high inflation, and tariffs exacerbating inflation expectations, market expectations have reversed, withdrawing from the "Trump trade" and starting to price in an "economic recession." According to this logic, the decline of the three major stock indices may just be the beginning.

After mid-January, the yield on the U.S. 10-year Treasury bond continued to decline, falling from a peak of 4.809% to 4.210%. This significant change in the "pricing anchor" reflects a substantial downward revision in the capital markets' expectations for an economic recession.

As inflation rebounds, signs of economic recession appear, and the stock market and 10-year Treasury yields plummet, market expectations for the Federal Reserve to cut interest rates this year have increased from once to twice. Technically, both the Nasdaq and S&P 500 have fallen below the 120-day moving average. Given the current severe situation, the market has raised its expectations for rate cuts, and if there is no positive response, it may continue to decline in the short term.

Crypto Assets: Medium to Long-term Investment Opportunities Emerge

In February, Bitcoin opened at $102,414.05, closed at $84,293.73, reached a high of $102,781.65, and a low of $78,167.81, with a total monthly decline of 17.69%, a drop of $18,113.53, and a volatility of 24.03%. The maximum drop from the peak was 28.52%, marking the largest pullback since this cycle (January 2023).

The monthly decline was concentrated in the last week, and the sharp drop in the short term has plunged the market into extreme panic. Corresponding to the maximum decline of the cycle, the Fear and Greed Index fell to 10 points on February 27, the lowest in this cycle, close to the 6 points during the low point of the previous bear market phase.

Technically, the "Trump Bottom" has been effectively broken, echoing the US stock market's retreat from the "Trump Trade." The "first upward trend line" and "second upward trend line" that were previously focused on have both been swiftly broken in a short period. By the end of the month, the Bitcoin price closed near the 200-day moving average.

In addition to being linked with the US stock market, the crypto market's cyclical decline this month is also related to negative events within the market.

On February 14, the president of a certain country promoted MEME coins on social media, sparking a speculative frenzy that drove its market capitalization to $4.5 billion. Subsequently, the creator withdrew funds from the trading pool, causing the coin's price to crash rapidly, leading to significant losses for investors.

On February 21, a hacker group exploited a technical vulnerability of a certain exchange, stealing over 400,000 ETH and stETH, with a total value exceeding $1.5 billion, marking the largest attack in cryptocurrency history in terms of USD.

On February 23, a certain contract was attacked, with stolen funds exceeding $49 million.

In addition, on March 1st, a certain token unlocking due to the bankruptcy liquidation of a platform will reach 11.2 million pieces, with a total value of approximately 2 billion USD. The unlocking scale accounts for 2.29% of the total issuance of the token, driving its price to fall by over 50% throughout the month in a weak market backdrop.

Analysis suggests that the largest decline in the crypto market occurred in February, primarily driven by the drop in the U.S. stock market due to recession expectations, which can also be understood as a correction pricing for the "Trump trade." Based on the drop in the U.S. stock market, Bitcoin could theoretically drop to around $73,000, but considering the enhancement of Bitcoin's fundamentals due to the Trump administration far outweighs the U.S. stock market's decline, the probability of reaching this theoretical low is relatively low. The cycle is still ongoing, and based on the self-adjustment of U.S. policies and the mid-to-long-term optimistic logic in the crypto market, Bitcoin may currently present mid-to-long-term investment opportunities. It is recommended to cautiously increase positions in batches.

Capital Flow: Significant Outflows from ETF Channel

As Trump's trading sentiment cools, the inflow of funds into the crypto market in February has significantly slowed down. This slowdown in inflow has continuously interacted with the price decline, ultimately leading to a violent drop in Bitcoin's price after consolidating around $96,000 for a long time in the last week of February. The scale of fund inflow in February has decreased significantly to $2.111 billion.

In-depth analysis of various types of funds reveals that stablecoin funds and Bitcoin spot ETF channel funds show divergent attitudes. Stablecoin channels had an inflow of 5.3 billion dollars throughout the month, while ETF channel funds experienced an outflow of as much as 3.249 billion dollars.

It has been pointed out multiple times that the Bitcoin spot ETF has mastered the medium and short-term pricing power of Bitcoin, therefore the price trend of Bitcoin is highly correlated with the trend of US stocks.

This month, Bitcoin spot ETF outflows exceeded $3.2 billion, becoming the most direct external reason for the decline, setting a record for the largest monthly sell-off since its launch. The future trend of Bitcoin mainly depends on the improvement of U.S. economic expectations and the inflow of funds back into the Bitcoin ETF spot channel.

Secondary Sell-off: Short-term Investors Under Pressure

Since the second round of sell-off began on October 2, 2024, 1.12 million bitcoins have shifted from long-term holding to short-term holding. The second round of sell-off is seen as a necessary condition for the end of a bull market cycle, with the underlying logic being that once the scale of active bitcoins grows to a certain level, liquidity will be exhausted, leading to the complete destruction of the upward trend.

Looking back at the consolidation and crash in February, long-term holders showed extreme restraint, only selling 7,271 coins. In fact, existing long-term holders have long ignored the "Trump bottom" range quotes (89,000~110,000 USD), choosing to hold their coins and wait for a rise.

In the last week of February, the lost chips that were transferred mainly came from short-term holders. According to on-chain data analysis, short-term holders were still holding firm until February 24, after which there was a massive sell-off on the 25th, resulting in a loss of 255 million USD for on-chain short-term holders alone that day. This marked the second-largest loss day of this cycle, second only to August 5, 2024 (with on-chain losses of 362 million). Historically, after short-term holders experience such large losses, the market often approaches a phase bottom.

In-depth on-chain analysis reveals that since February 24, the number of bitcoins distributed in the range of $78,000 to $89,000 has increased by 564,920.06, while the number of bitcoins distributed in the "Trump Bottom" range ($89,000 to $110,000) has decreased by 412,875.03.

The "Trump bottom" range was formed between November last year and February this year, and the holders in this range are typical short-term investors. The sell-off of the loss-making chips by short-term investors attempts to build a mid-term bottom, which also solidifies the range of 73000~89000, where there are relatively few chips.

Conclusion

In the January report, we emphasized that "the biggest external uncertainty comes from the chain reaction formed by the implementation of Trump's economic policies on interest rate cut expectations and capital supply. Once liquidity is constrained, volatility will rise significantly." This concern has indeed come true.

According to the analysis, the selling of loss-making chips mainly comes from short-term investors, while long-term holders have quietly slowed down their selling and are waiting for prices to rise. It is judged that the current bull market is only in a consolidation phase, rather than turning bearish.

We believe that the largest-scale pullback of Bitcoin in this cycle occurred in February, triggered by the historical high of the US stock market repricing the "economic recession expectations," leading to a large outflow of funds from Bitcoin spot ETFs. The turning momentum will also come from a shift in expectations and a trend rebound in the US stock market.

The internal structure is relatively stable, and Bitcoin and the crypto market are still operating within cyclical patterns. The short-term price decline presents long-term investment opportunities.

It is necessary to pay close attention to the trends in the US macro economy, market expectations, and the Federal Reserve's attitude towards restarting interest rate cuts.

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