Experts Note the Risks of the Crypto Winter Continuation

The baseline scenario for 2023 is the onset of a recession in the U.S. economy and a new wave of sales in the stock market. Under these conditions, cryptocurrencies will be subject to negative revaluation.

According to analysts, the situation can change only by the reduction of interest rates of the Fed.

Experts doubted the peak strengthening of the U.S. dollar, which is associated with the flight from risk and the fall in the value of cryptocurrencies. The current weakening of the U.S. national currency, associated with a sharp decline in inflation and expectations of the Chinese authorities to abandon the policy of zero tolerance for COVID.

According to observations, the U.S. bond market signals that the Fed could raise the rate to 4.84% by May 2023 and lower it by 40 bps+ in the second half of the year.

Such views contradicted the nature of Fed chief Jerome Powell's speeches. Central bank officials stressed the strength of the labor market and the risks of insufficient policy tightening in the face of the threat of inflation.

The experts tested the dollar index (DXY) and business activity index (PMI) model, which have a strong correlation. They concluded that the U.S. currency probably has not yet peaked in the absence of a strong "cooling" of the economy.

The hypothesis regarding the capitulation of crypto investors, which could be a signal of the end of the bear market, has also not been justified. To this end, experts analyzed an index based on the volatility dynamics of bitcoin and Ethereum put and call options, as well as the smart money risk appetite indicator they developed.

The latter entered the "risk-readiness" zone in May 2022, while the former still remains at the opposite pole.

Finally, analysts decided to draw parallels between digital asset markets and equity markets because of the increased correlation between them since 2021. "Normalizing" the correlation between risk premiums in these asset classes in 2022 increased the predictive power of the index.

The experts recalled that in 2008 and 2020, the risk premium in equities jumped to 20% with an average value above 5%. Currently, the metric fluctuates in the 8-9% range.