A prominent crypto research firm has issued a stark warning about the future trajectory of Bitcoin prices. The firm suggests that the recent downward trend in Bitcoin’s value could be merely the prelude to a more significant decline, citing concerns about an impending economic downturn and Bitcoin’s potential decoupling from broader stock market trends.
The report, penned by Markus Thielen of 10x Research, acknowledges some positive indicators in the crypto market’s recent performance. These include growing institutional interest in spot Bitcoin ETFs and the cryptocurrency’s resilience in the face of substantial Bitcoin returns from the Mt. Gox exchange. However, the analysis takes a decidedly bearish turn when considering the broader economic landscape.
Of particular concern to the researchers is the apparent divergence between the stock market’s robust performance – driven in large part by enthusiasm surrounding artificial intelligence – and indicators of a weakening underlying economy. The Institute for Supply Management’s Manufacturing Index, a key economic metric, has shown worrying signs that have sent ripples through various risk assets, including cryptocurrencies.
According to Investopedia, the ISM Manufacturing Index, also known as the Purchasing Managers’ Index (PMI), is a crucial monthly indicator of U.S. economic activity derived from surveys of purchasing managers at manufacturing firms nationwide. Conducted by the Institute for Supply Management (ISM), it provides a comprehensive snapshot of the health of the manufacturing sector and, by extension, the overall economy. This index reflects the level of demand for products by measuring ordering activity at factories across the country.
Released on the first business day of each month, the PMI can significantly influence investor and business confidence. The report includes data on new orders, production, employment, inventories, prices, and backlogs, offering a detailed view of manufacturing trends. The ISM Manufacturing Index is a composite measure that equally weighs new orders, production, employment, supplier deliveries, and inventories, with each factor seasonally adjusted.
Investors and business professionals closely monitor the PMI as it provides early insights into economic activity. A rising index typically signals an expanding economy, which can lead to increased corporate profits and a bullish stock market. Conversely, bond markets might react negatively to a rising PMI due to inflation concerns.
The monthly PMI announcement is influential because it reflects the perspectives of purchasing managers and supply chain executives who are directly engaged in their companies’ operational flow. These managers are well-positioned to assess business conditions, as manufacturers must adjust their material purchases in response to changes in demand for their products.
A PMI reading above 50 indicates expansion in the manufacturing sector compared to the previous month, a reading of 50 signifies no change, and a reading below 50 suggests contraction.
According to a press release issued by the ISM on Thursday (August 1), the latest Manufacturing ISM® Report On Business® revealed that economic activity in the U.S. manufacturing sector contracted in July for the fourth straight month and the 20th time in the past 21 months.
The Manufacturing PMI® fell to 46.8 percent in July, a decrease of 1.7 percentage points from June’s 48.5 percent. Despite the manufacturing sector’s struggles, the overall economy has expanded for 51 consecutive months following a brief contraction in April 2020. A PMI® above 42.5 percent typically signals overall economic expansion. However, key indices remained in contraction territory: the New Orders Index dropped to 47.4 percent, the Production Index fell to 45.9 percent, and the Employment Index declined significantly to 43.4 percent.
July’s report indicated mixed signals on pricing and supply chain metrics. The Prices Index increased slightly to 52.9 percent, while the Supplier Deliveries Index rose to 52.6 percent, suggesting slower deliveries. Inventory levels continued to decline, with the Inventories Index registering 44.5 percent. The New Export Orders Index and Imports Index remained in contraction, recording 49 percent and 48.6 percent, respectively.
Timothy R. Fiore, CPSM, C.P.M., Chair of the ISM Manufacturing Business Survey Committee noted that U.S. manufacturing activity deepened its contraction due to weak demand, declining output, and generally accommodative inputs. Companies reduced production and employment levels in response to ongoing demand slowness and federal monetary policies discouraging capital and inventory investment. Manufacturing GDP contraction affected 86 percent of the sector in July, up from 62 percent in June. Notably, all six major manufacturing industries experienced contraction, with significant declines in machinery, transportation equipment, fabricated metal products, food, beverage, tobacco products, chemical products, and computer and electronic products.
Conversely, five manufacturing industries reported growth: printing and related support activities, petroleum and coal products, miscellaneous manufacturing, furniture and related products, and nonmetallic mineral products. Respondents provided mixed feedback, indicating challenges such as softened demand, inventory management issues, geopolitical concerns, and shifting consumer behaviors impacting sales forecasts. Many noted a general economic slowdown, with some businesses experiencing significant declines in order levels and negative net income.
Historical data suggests that Bitcoin has often experienced sharp corrections when the ISM index reaches its peak. The current situation is further complicated by the lingering effects of COVID-era stimulus measures and aggressive government support, which the report suggests may have artificially inflated stock market valuations.
While the Federal Reserve has recently adopted a more dovish stance, hinting at potential interest rate cuts later in the year, the research firm warns that such measures might prove insufficient to stave off an economic downturn. This pessimistic outlook is reinforced by the increasing probability of a recession in 2025, a scenario that has historically been accompanied by significant stock market declines.
Should this economic forecast materialize, the report suggests that Bitcoin could face a substantial sell-off. The researchers draw parallels to the conditions that preceded the recessions of 2001 and 2007, implying that similar market dynamics could be at play in the current economic climate.
The analysis presents a particularly grim scenario in which the stock market follows the downward trajectory of the ISM Manufacturing Index or begins to price in an imminent recession. Under such circumstances, the report posits that stock values could see significant declines over the coming quarters. This downturn in the broader market, the researchers argue, would likely have severe negative implications for Bitcoin’s value.
In the most pessimistic projection, the report suggests that Bitcoin prices could potentially revisit the $50,000 level or even fall below this threshold. This forecast stands in stark contrast to the bullish sentiment that has dominated much of the cryptocurrency market in recent months.
At the time of writing (3:10 p.m. UTC on August 3), Bitcoin is trading at round $62,010, down 1.1% in the past 24-hour period.
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