TL;DR:

• The crypto asset class is benefiting from a new normal of economic conditions that is currently impacting financial markets.

• There are five primary macroeconomic factors that are creating unique investment opportunities in crypto.

• Crypto will likely have less sensitivity to recession, inflation, and monetary policies relative to other risk assets going forward.  

• The potential for US dollar depreciation as well as macro and geopolitical volatility should also benefit crypto assets. 

• As these developments unfold and alter an uncertain economic landscape, an allocation to crypto is an important consideration for long-term investors.     

 

The current macro environment is a new normal for financial markets. For the past 15 years, we have been in the land of cheap money, low interest rates, and accommodative monetary and fiscal policy. As a result, investment opportunities in this economic environment are different from those in the past. 

The crypto asset class, which has developed in parallel with these conditions over the last decade and a half, is currently presenting investors a unique opportunity driven by both secular and cyclical trends. Here, we share five reasons the current environment is an unprecedented investment opportunity in crypto assets. 

 

1. Crypto is relatively less sensitive to recession.  

A recession in the US or Europe is new territory for crypto, and because a lot of crypto risk sentiment is driven by retail investors, the asset class would be negatively impacted by recessionary conditions. However, there are two important factors that will soften the impact of a recession. 

The first is the increasing institutional participation we have seen in recent years. Large institutional investors will be enticed to enter the market as soon as they believe the recession is fully priced into crypto prices or if they believe it will be a shallow recession. Crypto assets currently look relatively undervalued compared to previous all time highs and, if a US bitcoin ETF is approved, institutional participation will be amplified as these large players will have a new vehicle to make this trade.

The second factor is that crypto depends on global growth, not the growth of one particular country or region, which helps make it more resilient. Growth estimates for China and India are 5.4% and 6.0%, respectively, while GDP in the US and Europe is expected to be 1.7% and 0.9%¹.  A recession or low growth in Europe and the US together with higher growth in emerging markets creates a relatively better backdrop for crypto, which isn’t linked to any one economy. 

 

2.The inflation path is constructive for crypto assets.

Many analysts expect inflation to be “higher for longer” (i.e., above the central banks target) before a likely gradual slow down by the end of 2024². The current high inflation environment has led to many first-time crypto investors who have witnessed the loss of purchasing power as a consequence of the fiscal and monetary largesse of the last decade. Higher-for-longer inflation is a solid backdrop for crypto adoption, as investors can compare the inflation rate of fiat economies with that of Bitcoin (low and going lower) and Ethereum (which is disinflationary).

Additionally, as inflation starts coming down there will be conditions for monetary easing. This is a positive backdrop for crypto prices as monetary easing tends to favor risky assets and we expect crypto to react positively once the market prices in that inflation has peaked. This is something well documented in the equity market, where prices typically rebound even before the start of the easing cycle.  

 

3.The monetary policy path is also constructive for crypto.  

Central banks in developed markets (DM) are close to—or at—their peak monetary policy rates while many emerging markets (EM) have already hit peak rates. The likely path going forward is rate cuts, with EM central banks acting to cut rates ahead of their DM counterparts. For example, Amundi recently noted that they expect the Fed to start cutting rates by early 2024 and the Fed funds rate to be 3% by the end of 2024 (more than 200 basis points lower than now), and the ECB to start rate cuts by mid-2024 before driving the policy rate to 2.25% (about 150 basis points lower) by the end of 2024. Rate hikes have the most downside impact on crypto and other risky assets. We believe hikes are mostly behind us and most central banks will begin monetary easing in the coming months. 

 

 

4. Crypto assets will benefit from USD FX depreciation. 

Compared to DM currencies, interest rate differentials favor the US dollar because the US has a positive real policy rate unlike other DMs and hence is more attractive to capital flows, which supports a stronger dollar versus DM currencies. Many analysts believe the USD is currently overvalued and could correct and likely depreciate versus EM currencies. If this happens as the Fed embarks on monetary easing and rate cuts cycle, this will decrease the interest rate differentials and could lead to USD depreciation against DM currencies as well. 

This is positive for crypto because USD depreciation enables a risk-on environment, generally supportive of emerging markets and commodities, that will also benefit crypto. Additionally, USD depreciation makes crypto cheaper for non-USD investors. Because crypto has many EM investors, this creates better investor entry points and long-term return potential. 

_{Source: BofA} 

 

5. Macroeconomic and geopolitical volatility supports the investment case for crypto.

Geopolitical volatility abounds as the risk of escalation in China/US tensions and the Ukraine/Russia crisis strain supply chains and commodity and energy markets. This could lead to some supply shocks, global inflation, and more momentum for the BRIC countries decoupling and pursuing de-dollarization. Crypto and gold will be viewed as global safe havens as they benefit from the decreased reliance on USD for international trade and to safeguard wealth. As a digital bearer asset and censorship-resistant asset, crypto has unique features over gold and will have the edge as the store of value of choice.  

 

Why is now different? 

We believe these macroeconomic factors taken together are creating a unique opportunity for investors to get exposure to the crypto asset class. Attractive valuations, an end to increasing inflation and Fed tightening, and a possible US dollar depreciation bode well for crypto as institutions, governments, and investors gain a better appreciation for the maturation of the asset class and its relevance within portfolios. 

Our team at Hashdex continues to encourage investors to explore the benefits of even a modest crypto allocation over the long term. And, as macro events continue to shift and alter the investment landscape, crypto assets are a consideration that we believe will only grow in importance as more economic uncertainty persists.  

 

 _{¹ OECD Economic Outlook, Volume 2023, Issue 1}

 _{² Amundi Mid Year Outlook, June 2023}

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