The past August has been a challenging month for the cryptocurrency market, as the price of Bitcoin (BTC) experienced a 30% correction, falling from $70,000 to a low near $49,000.
However, according to analysts, the drop below $50,000 may signal the bottom of the correction, with expectations for improvement in the last quarter of 2024.
André Dragosch, Head of Research at ETC Group, stated: "Due to the intensification of the US economic recession, cryptocurrency assets and traditional financial assets suffered significant devaluation in August."
"The main catalyst was the disappointing US employment report in July, which showed an increase in the US unemployment rate, triggering many popular recession indicators, such as the 'Sam Rule'."
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He added: "Furthermore, the sharp appreciation of the Japanese yen (JPY) sent shockwaves through traditional financial markets, as carry traders unwound their positions due to the Bank of Japan raising key interest rates in Japan, exacerbating the risk-averse behavior at the beginning of August."
Dragosch noted that the result was a plunge in cryptocurrency sentiment to the lowest level since the FTX collapse in November 2022.
He observed: "This pronounced bearish sentiment in the cryptocurrency market also coincides with a significant decline in cross-asset risk appetite in traditional financial markets."
"That being said, we believe that the macro and cryptocurrency sentiment capitulation at the beginning of August likely marks a significant tactical bottom for Bitcoin, and thus also the start of a new bull market."
Dragosch stated that one of the main reasons for the bullish outlook is that "the financial markets quickly priced in a reversal of the Fed's monetary policy after the market turmoil at the beginning of August, which was also confirmed by Fed Chairman Powell's latest deliberations at the central bank symposium held in Jackson Hole, Wyoming."
Dragosch stated that Powell made it clear that "with a weakening labor market, the Fed's monetary policy is about to reverse, likely starting this month," and "the expectation of easy monetary policy will inevitably provide a positive impetus for Bitcoin and cryptocurrency assets in the coming months."
He pointed out that after the yen carry trade was unwound, the value of the yen rose as carry traders closed their positions, selling foreign currency assets to repurchase yen short positions.
He said, "The yen appreciation is consistent with a broader softening of global growth expectations due to increased risks of a US economic recession."
Dragosch added: "This observation is also consistent with the continued rise in gold prices amid safe-haven demand and increased expectations of a shift in Fed monetary policy."
With Fed Chairman Jerome Powell providing a clear signal that a shift in monetary policy is imminent, and a rate cut in September on the agenda, Dragosch stated that ETC Group's "market-based monetary policy expectation indicator now clearly indicates a positive outlook for monetary policy."
He said: "This will inevitably provide a positive impetus for Bitcoin and other cryptocurrency assets in the coming months."
"Federal funds futures have priced in slightly more than nine rate cuts, each of 25 basis points, with a final rate of 3%, to be reached by the end of 2025.
Thus, the market has already anticipated a significant reduction in the Fed's fund target rate."
Despite these efforts, Dragosch stated that their "base case remains that the US economic recession becomes a reality."
He said: "As we speak, the US economy is likely already in recession."
"If a recession occurs, the market will likely consider further rate cuts by the Fed, as the average reduction in the Fed funds rate during past US recessions has been about -340 basis points (median: -300 basis points)."
Dragosch highlighted several reasons for expecting a US economic recession, including the triggering of the "Sam and Mel Rule," "which is a clear signal of an imminent economic recession," and "the gap between expectations and current conditions in the Conference Board's consumer survey reached a new cyclical peak in July, indicating that we have entered a recession."
He added: "The prominent 'jobs hard to get' and 'jobs plentiful' sub-indicators also suggest that US consumers believe the labor market conditions have significantly deteriorated."
"Another reason to assume a general weakening of the US labor market is that wage growth has recently been significantly revised downward," pointing out that non-farm employment growth has decreased by 818,000 people as of March 2024.
He said: "Due to institutional surveys showing a significant decline in the number of US institutions, contrary to what household surveys and wage data still suggest, the downward revision of US wages is likely to continue into the future."
"Therefore, before further revisions, the Bureau of Labor Statistics' wage statistics are likely to continue to overstate the 'true' state of the US labor market."
Dragosch noted that although "leading indicators of unemployment have not yet suggested an imminent surge in layoffs... this could change in the fourth quarter as layoffs are often announced around the end of the year."
He said: "The recent rise in unemployment has been mainly due to a significant decline in job openings and hiring across the economy."
"This is also reflected in the LinkUp 10,000 data and the job vacancy data published by Indeed, with job vacancies continuing to decline, consistent with the official job vacancy statistics in the JOLTS data."
Dragosh stated that although a recession is a negative development for most assets, there are several factors suggesting that this could be positive for cryptocurrencies.
"The macro capitulation at the beginning of August coincided with the capitulation of cryptocurrency sentiment, which greatly limited further declines," he said.
"On August 5th, market-based global growth expectations hit a multi-year low, and our internal cryptocurrency sentiment index hit the lowest level since November 2022, when FTX collapsed.
A major growth scare seems to have been priced in, so the impact of an actual economic recession on the future performance of cryptocurrencies may be smaller."
He added that a second positive factor is that "Bitcoin's sensitivity to global growth expectations is declining, which reduces the risk of cryptocurrencies from a potential US recession."
"Instead, we are shifting from headwinds (growth) to tailwinds (monetary policy, dollar)."
Dragosch stated: "Our macro factor model indicates that Bitcoin's performance over the past 120 days has been explained more by other macro factors such as monetary policy expectations or the dollar (providing tailwinds), rather than changes in global growth expectations (which have been headwinds)."
"In particular, we are also seeing an increasing share of Bitcoin's residual/non-macro/coin-specific factors in the explanatory power, which means the likelihood of Bitcoin decoupling from the risk of increased US recession risk is increasing."
Third, he said, "The tide of monetary policy is turning, and the Fed is about to cut rates for the first time."
He noted: "Fed funds futures are priced for a total of nine cuts of 25 basis points each by the end of 2025, with a final rate of about 3%."
"The G5 central banks are shifting to an easing mode, and the global money supply has recently reached a historical high.
The expansion of the global money supply is often a bullish environment for Bitcoin and cryptocurrency assets."
He said the fourth reason to be bullish on Bitcoin is that "the dollar has been weakening, which is often a bullish environment for Bitcoin and cryptocurrency assets."
"A weak dollar environment is often the best environment for Bitcoin, and vice versa," he added.
"The reversal of Fed monetary policy associated with rate cuts and quantitative easing (QE) tends to be bearish for the dollar, which should provide an important impetus for the future development of Bitcoin and cryptocurrency assets."
"Bottom line: The simultaneous macro and cryptocurrency sentiment capitulation at the beginning of August provides a good foundation for a more sustainable bottom for Bitcoin," Dragosch concluded.
"Furthermore, we believe that Bitcoin's less sensitivity to changes in global growth expectations, coupled with a shift in global monetary policy and a broad weakening of the dollar, could provide very positive macro tailwinds for the future of Bitcoin and cryptocurrency assets."