A strong recession could trigger another correction in the cryptoassets market

The contraction of the US economy, for the second consecutive quarter, leaves the country in a state of technical recession that, pending confirmation by the National Bureau of Economic Research (NBER), puts investors on alert, especially those with exposure to risk assets such as cryptocurrencies. The market for now does not seem to echo that there is danger, due to the fact that as denoted by some analysis and recent stock market performance, risk appetite picks up market weight.

However, "even if the US is not in a recession (yet), the underlying signals are worrying," stated Gilles Moëc, chief economist at AXA Investment Managers. Another key ingredient in the NBER framework is the performance of the labor market and in this regard Moëc commented: "Significant job losses are needed for a recession to be declared 'proper'. Thus, "a weak number in the employment results released this week would probably close the square for a recession." In any event, "it may be too soon for the ongoing slowdown in activity to cause a large decline in jobs. We may have to wait, which could trigger significant volatility in the market," he concluded.

These risks are new for crypto assets that seem to have discounted the idiosyncratic issues of cryptocurrencies, as that resulted in a deep correction in digital assets over the past 90 days, indicated Bank of America (BofA) experts. "Also, risks related to rising rates, inflation and a mild recession are probably discounted" by investors, they added.

However, "a sharp recession could trigger another correction in risk assets, including digital cryptoassets. Although token prices have risen over the past two weeks, digital assets have fallen by more than 20% since mid-May and remain highly correlated with risk assets," they commented. While the GDP contraction in the first half of the year may not constitute a recession, the rest of the year is another matter entirely. "The mere prolongation of the current trend in final domestic demand would set the stage for one, probably in the last three months of 2022," stated Moëc.

As to what exactly will happen in the digital currencies market should such a scenario be triggered, experts do not believe that the outcome will be positive in this half-year. The "most prudent stance is to wait for more negative news," noted Ramiro Martinez-Pardo, CEO of HeyTrade. "Interest rates still have room to rise, and that will drain even more liquidity from the crypto market," he added.

Right now, though, and after the 'horribilis' half-year for crypto currencies, BofA's capital flows analysis indicates that the market value of digital assets rose 11% in the last two weeks to $969 billion. Stablecoins recorded 3 consecutive weeks of net inflows for the first time since mid-February as users re-engage.

Net inflows on cryptocurrency trading platforms over the past 2 weeks offset only 5% of net outflows since the beginning of April and followed net outflows for 15 of the previous 19 weeks. "The low supply and volume of net outflows from cryptocurrencies indicate that investors remain bullish," they commented from BofA. Net inflows into ETH platforms last week strengthened, following net outflows in the previous two weeks, "indicating that investors are taking advantage of the optimism surrounding the seemingly imminent 'Merge' to take profits," experts stated.