- Crypto analyst Lark Davis has shared some of the events that may destabilize the crypto market this year.
- Certain parts of the crypto industry may see growth as people seek alternative sources of livelihood.
Five main events spell high risk to the crypto industry, crypto analyst Lark Davis has warned. These are:
Recession
The Bank of America (BOA) is the latest major institution to warn of the possibility of recession shock. As Davis points out, stocks perform their worst 6-12 months before a recession, with mixed positive and negative performance during the recession. Following a recession, markets tend to gain momentum and give positive returns.
Should such an event be announced, its effects will span across both the equity and the cryptocurrency markets. The reason is the increased correlation between crypto and stock markets.
Interest rate hikes
History shows that there is an initial shock in the first week or the first few months following a Fed interest rate hike. After a 5-10 percent drop lasting about a year, markets begin to show mildly positive returns in the first 3-6 months. The next 6-12 months are marked by more positive returns. Generally, trends show positive returns in the stock market following a rate hike cycle. For instance, the S&P 500 has risen at an average annualized rate of 9.4 percent during 12 rate hike cycles. As noted above, there will likely be similar reactions in the crypto market.
Inflation
Per the latest report, the annual inflation rate in the US is at 8.5 percent, compared to 7.9 percent a year ago. Places like Germany have seen up to 50 percent price hikes in some food items.
As Davis demonstrates, when inflation is at 3 percent and higher, there is a 48 percent equity market return exceeding the inflation rate over 12 months. It is likely inflation rises even higher in the coming months. Equity markets will therefore likely report returns lower than 8.5 percent in the next year. These would also replicate in the crypto market.
More Dangers lurking for the Crypto Market
Russia-Ukraine Conflict
Both Ukraine and Russia are global food exporters in leading cereal crops, while Russia is the world’s largest crude oil producer. The prevailing conflict between the two nations has led to a shortage of these items and the resultant skyrocketing prices. Similar to inflation, this will likely adversely affect crypto markets.
FED Selling
As part of the quantitative tightening measures, the Fed is considering selling out assets worth $95 billion every month. The result is increased pressure in equity markets, which could pour into crypto markets as well.
The Silver Lining
The above events raise uncertainty, lowering the risk appetite for both crypto and traditional investors. However, Davis sees a silver lining to this cloud:
So if a recession happens and a bunch of people loses their jobs (which is terrible BTW), then #crypto could pump hard!
Why?
Well, millions of people [will]suddenly discover play-to-earn games, DeFi degen sh*t, trading, NFT flipping.
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