In the latter half of last week, we began to see a mild decline across the American stock markets, which culminated in a drastic drop not only in stocks but also in crypto, from Sunday night to Monday morning. Is a recession coming, or is this just a temporary drop in stocks and crypto?
RECESSION: FEAR IS GROWING
Every recession has its beginnings, indicated by various factors. Still, one of the main indicators of global trends is the American market, which, with the publication of interest rates, unemployment rates, and new jobs, dictates the global economic status.
With this in mind, let’s look at their latest reports. Contrary to expectations, the unemployment rate has risen, and they have not met their goal in creating new job positions.
In numbers: they created about 60,000 fewer jobs than expected. Alongside the rise in unemployment, the number of unemployed has increased by 352,000 to 7.2 million unemployed, working-age Americans. These are the highest percentages since October 2021.
STOCK MARKET REACTION
The forecast and expectation of a recession have been visible in the markets since the beginning of August. If we first look at the more traditional markets, we see a noticeable drop, with some comparing it to the historic Black Friday of 1929.
The data from the American economy has been reflected not only in American exchanges but also worldwide. The Asian side of the world is most exposed this time, particularly Japan, where stock trading was even briefly halted. The Tokyo Stock Exchange index, known as the Nikkei index, experienced a drop of 12.4%. Along with the stock price index (Topix), both performance measures are on their way to the worst three-day drop since the Japanese tsunami and the Fukushima nuclear disaster in 2011.
However, established financial advisors, such as those at Edward Jones, remain optimistic: “Despite short-term market pullbacks, the outlook remains positive with inflation nearing target, economic expansion continuing, productivity rising, and corporate earnings improving.”
CRYPTO MARKET RESPONSE
Of course, the cryptocurrency market is not immune to such drastic shifts, and consequently, we woke up to red numbers and candles. Naturally, all eyes turned to Bitcoin, which hasn’t experienced such a drastic drop (15.85% in 24 hours) in such a short time since the FTX fiasco, followed by the second-largest cryptocurrency in the world, Ethereum (24h: ↓ 22.56%; 7 days: ↓ 33.14%).
The adoption of Bitcoin and Ethereum ETFs also contributes to such a significant drop. Since they trade on stock exchanges, their influence is more pronounced, and therefore, larger movements in stock markets and ETFs have a stronger impact on the crypto market.
We see such drops practically everywhere, in all crypto coins and tokens, not just in Bitcoin and Ethereum. Below, we can see a graph of the entire crypto market, excluding the values of the top 10 cryptocurrencies for a better overall picture.
POSSIBLE OUTCOMES OF THE MARKET DROP
Although the declines are already calming, not all experts agree. While some are still not convinced that this sharp, rapid drop is stopping, predictions can depend already on whether we are talking about stock or crypto markets.
The crypto community can be divided into several different groups, but some unwritten “rules” are mostly followed by all. Thus, “crypto enthusiasts” recognize drops as opportunities rather than red alarms, which can lead to a fairly quick market recovery. In crypto, we often hear the saying “Buy the dip,” referring to steep, rapid crypto drops that historically (mostly) recover sooner or later. Therefore, this unique community recognizes events like this as a good buying opportunity, even if fear is present in the market. This can be observed even among major players, such as Blackrock, which has been diligently buying Bitcoin over the past few days, despite the entire financial market being wrapped in red.
HOW TO REACT TO DROPS?
The first golden rule is never to make any moves in panic, especially if it involves the fall of entire financial markets and not just one specific stock or cryptocurrency.
Knowledge is power, a saying that truly serves as the main guide for reaction in such cases. Therefore, it is good to investigate sudden changes, as they never happen without a reason. In this case, it is the fear of a recession projected by American data, heavily affecting Asian or Japanese markets.
Understanding market sentiment also contributes to the broader picture. Ironically, in the crypto market, it is often said that the more fear is present, the better the buying opportunity. This can also be seen if we turn the picture around – the most greed is usually present when crypto values are very high, which can indicate upcoming profit-taking or sales.
Maintaining a long-term perspective is the third key that can help in your decisions. Remember, even though Bitcoin fell by nearly 16 percent in one day, it has grown by a good 75 percent in the last year.
