U.S. recession expectations reignite, Bitcoin suffers heavy losses but welcomes allocation opportunities

The global macro financial environment, especially in the US market, has undergone a sharp and dramatic shift.

U.S. inflation data rises, consumer confidence falls to a 15-month low, prompting traders to start pricing in recession expectations, causing the three major U.S. stock indices to quickly drop near the 120-day moving average.

Funds are beginning to seek safety, with the yield on the 10-year U.S. Treasury bond falling sharply, and gold also showing signs of a peak.

Affected by the linkage with the US stock market, Bitcoin, which had been gaining momentum, experienced a significant drop in the last week of February, facing the largest pullback and the biggest weekly loss of this cycle.

The analysis suggests that this wave of market movement is essentially a correction of previous optimistic expectations. Based on the adjustment space of U.S. policies and the long-term prospects of the crypto market, Bitcoin may currently be ushering in a good opportunity for medium to long-term allocation, and it would be prudent to build positions gradually.

Macroeconomics: Economic recession expectations drive the market downward, facing pressure in the short term.

The recent economic and employment data released by the United States, along with the fluctuations in tariff policies, have become the two core factors influencing the recent trends in the macro financial and cryptocurrency markets.

The non-farm payrolls for January, released in early February, only increased by 143,000, far below the expected 170,000. The obvious cooling of the labor market has heightened concerns about a recession in the U.S. economy.

The subsequently released January CPI month-on-month rate reached 0.5%, far exceeding the expected 0.3%, driving the annual rate to 3%. This marks the third consecutive month of inflation rebound in the United States, strengthening market expectations that the Federal Reserve may delay interest rate cuts. Even with signs of an economic recession, it is difficult to change the Federal Reserve's determination.

The final value of the U.S. Consumer Confidence Index for February, announced in late February, was 64.7, down from the initial value of 67.8, reaching the lowest point in 15 months. The continued low consumer confidence will inevitably transmit to the business sector.

This series of negative data ultimately shattered market confidence. The three major U.S. stock indices experienced significant declines in late February, wiping out all gains for the month. The Nasdaq index dropped 3.97% for the month, the Dow Jones Industrial Average fell 1.58%, and the S&P 500 index decreased by 1.42%, while the small-cap Russell 2000 index plummeted by 5.45%. Both the Nasdaq index and the S&P 500 index fell below the 120-day moving average.

For traders, the persistent rebound of inflation, the potential deterioration of the employment situation, and the looming shadow of economic recession may make reducing long positions the best choice.

In addition to the weakening economic data, the confusion surrounding tariff policies has also left the market feeling troubled. At the end of January, it was announced that a 25% tariff would be imposed on goods from Mexico and Canada, and a 10% tariff on goods from China. After several reversals, it was finally decided to implement these tariffs starting in early March, with an additional 10% tariff on China. At the same time, it was also stated that a reciprocal tariff policy would be implemented for Europe and other countries.

Previously, the market viewed tariff policies as bargaining chips, but they are now about to be implemented and may become an important factor in driving up inflation. This may exceed market expectations and intensify traders' pessimism.

The only possible positive impact on inflation and interest rate cuts from the Russia-Ukraine negotiations made smooth progress for most of February, but at the end of the month, a dramatic conflict occurred between the leaders of the two countries at a White House press conference, leading to the collapse of the agreement that was scheduled to be signed. Leaders of European countries expressed support for Ukraine, and the rift between the US and Europe may continue to deepen. The Russia-Ukraine conflict, which was nearing its end, has encountered new setbacks, making it difficult to conclude in the short term. As a result, the expectation of ending the war to increase oil production to reduce inflation has significantly diminished.

Since November last year, the market has engaged in "optimistic trading" based on strong economic growth expectations. Now, with weak employment data, high inflation, and tariffs increasing inflation expectations, the market's outlook has reversed, shifting from optimistic trading to pricing in "economic recession." According to this logic, the decline of the three major stock indices may just be the beginning.

After mid-January, the yield on the U.S. 10-year Treasury bond continued to decline, dropping from a peak of 4.809% to 4.210%. This significant change in such an important indicator reflects the capital market's pessimistic outlook on the economic prospects.

With the rebound of inflation, signs of economic recession, and a significant decline in stock markets and government bond yields, the market has raised its expectations for the Federal Reserve to cut interest rates from once to twice this year. Technically, both the Nasdaq index and the S&P 500 index have fallen below the 120-day moving average. Given the current dire situation, the market has increased its expectations for interest rate cuts, and if there is no positive response, it may continue to decline in the short term.

Crypto Assets: Key Support Broken, Mid to Long Term Configuration Opportunities Ahead

In February, Bitcoin opened at $102,414.05, closed at $84,293.73, reached a high of $102,781.65, and a low of $78,167.81, with a total drop of 17.69% for the month, a decrease of $18,113.53, and a volatility of 24.03%. The maximum drop from the peak was 28.52%, marking the largest retracement since the current cycle began in January 2023.

The monthly decline was concentrated in the last week, with a rapid short-term drop causing the market to fall into extreme panic. Corresponding to the maximum decline of the cycle, the Fear and Greed Index dropped to 10 points on February 27, the lowest of this cycle, close to the 6 points during the last cycle's bear market when LUNA collapsed.

From a technical perspective, the important support level has been effectively broken, echoing the retreat from previous optimistic expectations in the US stock market. The "first ascending trend line" and "second ascending trend line" that were previously focused on have both been rapidly breached in a short period of time. By the end of the month, the Bitcoin price closed near the 200-day moving average.

In addition to being linked to the US stock market, the cyclical decline of the crypto market this month is also related to negative events within the market.

In mid-February, the President of Argentina promoted the MEME coin Libra on social media, triggering a speculative frenzy and driving its market value to soar to 4.5 billion USD. Subsequently, the creator withdrew funds from the trading pool, causing the coin's price to crash rapidly and resulting in heavy losses for investors.

In late February, suspected North Korean hackers exploited a technical vulnerability of a certain exchange to steal over 400,000 ETH and stETH, with a total value exceeding $1.5 billion, becoming the largest dollar-value attack in cryptocurrency history.

On February 23, the Infini contract was attacked, with stolen funds exceeding $49 million.

In addition, the unlocking of SOL tokens due to the bankruptcy liquidation of a trading platform in early March will reach 11.2 million pieces, with a total value of approximately 2 billion USD. The unlocking scale accounts for 2.29% of the total issuance of SOL, pushing the price of SOL to drop by more than 50% throughout the month in a weak market context.

Analysis suggests that the largest drop in the crypto market this cycle in February was directly caused by a decline in U.S. stocks driven by expectations of an economic recession, which can also be understood as a correction of previous optimistic expectations. Theoretically, Bitcoin could drop to around $73,000, but considering that policy improvements to Bitcoin's fundamentals far exceed those of U.S. stocks, the likelihood of reaching this theoretical low is relatively low. The cycle continues, and based on the space for policy adjustments and the long-term prospects of the crypto market, Bitcoin may currently be facing a good opportunity for medium to long-term allocation, and it would be prudent to gradually build a long position.

Capital Flow: A significant outflow of ETF funds has become the direct cause of the decline.

As optimistic sentiment cools, the inflow of funds into the crypto market in February has significantly slowed down. This slowdown in inflows interacts with falling prices, ultimately leading to a sharp drop in the price of Bitcoin after a prolonged period of consolidation around the $96,000 mark in the last week of February. The scale of fund inflows in February has decreased significantly to $2.111 billion.

In-depth analysis of capital flow reveals a divergence between stablecoins and Bitcoin spot ETFs. The stablecoin channel saw an inflow of 5.3 billion dollars throughout the month, while the ETF channel experienced an outflow of as much as 3.249 billion dollars.

It has been pointed out multiple times that the Bitcoin spot ETF has gained control over the short to medium-term pricing of Bitcoin, thus the price trend of Bitcoin is highly correlated with the U.S. stock market.

This month, the outflow from Bitcoin spot ETFs exceeded $3.2 billion, setting a record for the largest monthly sell-off since their launch and becoming the most direct external reason for the decline. The future trend of Bitcoin mainly depends on the improvement of U.S. economic expectations and the inflow of ETF funds.

Chip Analysis: Short-term Investors Stop Loss Selling

Since the new round of selling started in early October 2024, 1.12 million Bitcoins have shifted from long-term holders to short-term holders. The sell-off is seen as a necessary condition for the end of the bull market cycle, with the underlying logic being that after the scale of active Bitcoins grows to a certain extent, liquidity will be exhausted, leading to a break in the upward trend.

During the consolidation and sharp decline in February, long-term holders showed extreme restraint, selling only 7,271 coins. In fact, existing long-term holders have long ignored the quotes in the range of $89,000 to $110,000, choosing to hold their coins in anticipation of price increases.

In the last week of February, the transferred loss chips mainly came from short-term holders. On-chain data analysis shows that short-term holders were still holding firm until February 24, but began to cut losses on the 25th. On that day alone, on-chain short-term holders realized a loss of $255 million. This was the second largest single-day loss of this cycle, only behind August 5, 2024 (on-chain loss of $362 million). Historically, after short-term holders experience large losses of similar scale, the market often welcomes a phase of bottoming.

In-depth on-chain analysis reveals that since February 24, the number of Bitcoins in the $78,000-$89,000 range has increased by 564,920.06 coins, while the number of Bitcoins in the $89,000-$110,000 range has decreased by 412,875.03 coins.

The range of 89,000 to 110,000 USD was formed between November last year and February this year, and the holders in this range are typical short-term investors. The sell-off of losing chips by short-term investors is attempting to build a mid-term bottom, and it also solidifies the range of 73,000 to 89,000, which has relatively few chips.

Conclusion

The January report emphasized that "the greatest external uncertainty comes from the chain reaction formed by the implementation of economic policies on interest rate cut expectations and capital supply. Once liquidity is constrained, volatility will rise significantly." This concern has already come true.

According to the analysis, the selling of loss-making chips mainly comes from short-term investors, while long-term holders have quietly slowed down their selling and are holding coins in anticipation of a rise. It is judged that the current bull market is only in a consolidation state, rather than turning bearish.

In February, the largest scale correction of Bitcoin in this cycle occurred, triggered by the historical high of the US stock market adjusting its pricing for "recession expectations," leading to a large outflow of funds from Bitcoin ETFs. The turning point will also come from a shift in expectations for the US stock market and a trend rebound.

The internal structure is relatively stable, Bitcoin and the crypto market are still operating within the cycle, and the short-term price decline presents medium to long-term allocation opportunities.

It is necessary to pay close attention to the trends in the US macroeconomy, market expectations, and the Federal Reserve's attitude towards restarting interest rate cuts.

![EMC Labs February Report: US Economic Recession Expectations Resurge, BTC Faces Cyclical Heavy Damage, Welcoming Medium to Long-Term