Crypto markets have been flying this year, but an ongoing depressed outlook for the world economy could clip those wings.
According to a WEF report on Jan. 16, the International Monetary Fund (IMF) expects around a third of the global economy to enter a recession in 2023.
“Global growth prospects remain anaemic and global recession risk is high.”
The report added that businesses face a “triple challenge” at the start of 2023. High prices of key inputs, tightening monetary policy, and weakening demand will put a dampener on any economic recovery.
Chief economists also see staff shortages, talent availability, and major cost-cutting to be factors. This all has a trickle-down effect on the retail consumer at the bottom of the pile.
Why Crypto Markets Could Be Impacted
Furthermore, the US savings rate has fallen to its lowest-ever level of around 2.3%. This metric is used to measure the amount of money a person deducts from their disposable income to set aside for investing.
Don’t look now, but the savings rate is at a 17-year low.
Excess liquidity is increasingly rare (and increasingly valuable) pic.twitter.com/lcWV73HuPd
— Jack Duffley (@JackDuffley) January 16, 2023
This could have a major impact on crypto assets which are generally considered high-risk. If there is less disposable income to go around, there will be fewer investors in risk-on assets such as crypto.
A recession is likely to impact this even further as higher prices squeeze more wallets, and only the wealthy can afford to dabble in risky crypto investments.
With this in mind, there is unlikely to be a full crypto market recovery in 2023, and consolidation could continue into 2024.
Only when inflation is under control, and the cost of living comes down will the wider economy start to recover. Only then will there be enough floating capital from the retail sector to risk on crypto assets.
Nevertheless, the WEF did acknowledge that crypto was here to stay in a report earlier this month.
Crypto Market Outlook
Markets have been rallying so far this year, but analysts are warning of a bull trap. There has been a slight pullback today, with total capitalization dipping to $1.03 trillion. However, the markets have surged 24% since the beginning of the year.
There is usually a Chinese New Year rally, so this one may well fizzle out after the festive period. The majors such as BTC and ETH have dropped a couple of percent today, and the other altcoins are also in retreat.