July 2023 Monthly Recap: Crypto and the Soft Landing Dream
Research Team
Last Updated: 8/1/2023 | 11 min. read
Digital asset markets have healed significantly since late 2022, and the crypto industry is benefiting from technological and increasingly legal and legislative tailwinds.
Macro factors may now be the biggest risk to crypto valuations. Recent economic data have shown a favorable mix of low inflation and steady growth, reducing the perceived odds of recession. In markets hopes of a “soft landing” have pulled in previous laggards to the risk asset rally–including crude oil and regional bank equities.
If the US economy can achieve a soft landing, the rebound in crypto market capitalization can continue. However, if the economy stumbles or the Federal Reserve raises real rates further, the crypto recovery may pause over the near-term.
While Bitcoin took a breather in July, the rally in other risky assets extended further, fueled by hopes of a “soft landing” for the US economy: the goal of bringing inflation sustainably back to target without a recession (Exhibit 1). In our view, crypto market capitalization would likely benefit in this scenario due to the correlation of major token valuations to risky assets, as well as a variety of current tailwinds for the industry. However, a soft landing is not assured, and is now increasingly a consensus view–and therefore already discounted to some degree by markets.
Aside from further regulatory developments, crypto’s near-term outlook may largely depend on how this debate unfolds. If incoming economic data continue to support the soft landing thesis, the year-to-date rebound in major token valuations can continue. But if the economy stumbles or the Federal Reserve raises real rates further, the crypto recovery may pause over the near-term. Until resolved, crypto markets may see more price volatility in alt-coins (those beyond Bitcoin and Ethereum), as has occurred over the past month.
Exhibit 1: Summer optimism about a “soft landing”
Exhibit 2: Year-to-date laggards outperformed in July 2023
Exhibit 3: BTC and ETH volatility declined
[1] For example, Bitcoin had one of the highest vol-adjusted returns among a set of global assets, while the Nasdaq and various AI-related equities or baskets had the highest vol-adjusted returns in the US equity market.
[2] For example, the Goldman Sachs Liquid Most Short basket gained 18% in July, as of July 31 2023. This basket includes stocks in the Russell 3000 Index with the highest percentage of short interest.
[3] For example, Bitcoin’s daily correlation with the S&P 500 was 30% in July, up from near zero in May.
[5] According to TradeView, prices rose from a price of $0.47 just prior to the announcement to an intraday high of $0.9479.
[6] Coin Metrics as of July 31, 2023.
[7] Coindesk, “House Financial Services Committee Votes in Favor of Crypto, Blockchain Bills” (July 26, 2023), https://www.coindesk.com/policy/2023/07/27/house-financial-services-committee-votes-in-favor-of-crypto-blockchain-bills/
[8] Coin Metrics as of July 31, 2023.
[9] CoinMarketCap, as of July 31, 2023.
[10] Allowing inflation to remain high would also cause inflation expectations to rise, reducing real interest rates, which we see as a key driver of Bitcoin’s medium-term valuation.
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The Federal Reserve (“Fed”) is the central bank of the United States. Its Federal Open Markets Committee (FOMC), consisting of members of the Federal Reserve Board and voting members of the presidents of the regional banks in the Fed system, decides the nation’s monetary policy. Volatility refers to the annualized standard deviation of an asset’s returns. Implied volatility refers to the level of prospective volatility that would equate current option prices with those of an option-pricing model. Crypto token “burn” refers to removing circulating supply through a smart contract mechanism. Basis point refers to one tenth of one percent, or 0.1%. Correlation is a statistical measure that quantifies the relationship between two or more assets.. Real interest rates refer to the rate of return on an investment after accounting for inflation in the price of goods over the same period.
The S&P 500 Index (SPX) is a market-capitalization-weighted index that measures the performance of 500 of the largest publicly traded companies in the United States. The Russell 3000 Index (RUA) is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. The KBW Regional Banking Index (KRX) is a modified market capitalization weighted index designed to track the performance of leading banks and thrifts that are publicly traded in the U.S. The Nasdaq Composite Index (NDX) is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. The Generative AI Enablers Basket Index (CGRBGAIE) represents a weighted group of several financial instruments. Generative AI, or generative artificial intelligence, is a form of machine learning that is able to produce text, video, images, and other types of content. You cannot directly invest in an index.
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There is no guarantee that the market conditions during the past period will be present in the future. Rather, it is most likely that the future market conditions will differ significantly from those of this past period, which could have a materially adverse impact on future returns. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. We selected the timeframe for our analysis because we believe it broadly constitutes the most complete historical dataset for the digital assets that we have chosen to analyze.
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