EMC Labs February Report: Expectations of a U.S. Economic Recession Resurface, BTC Faces Cyclical Heavy Blow, Welcoming a Good Opportunity for Medium to Long-term Allocation

Written by: 0xWeilan

++The information, views, and judgments regarding markets, projects, cryptocurrencies, etc., mentioned in this report are for reference only and do not constitute any investment advice.++

Globally, especially in the U.S., macro finance has undergone a rapid and dramatic shift.

U.S. inflation data has risen, while consumer confidence has dropped to a 15-month low, prompting traders to start pricing in expectations of a "U.S. economic recession," which has driven the three major U.S. stock indices down to near the 120-day moving average.

Funds have begun to take refuge, with the yield on the U.S. 10-year Treasury bond rapidly declining, and gold also showing signs of topping out.

Affected by the correlation with U.S. stocks, BTC, which had been building momentum, plummeted in the last week of February, experiencing the largest pullback and the largest loss week of this cycle.

EMC Labs believes that this market trend is essentially a pricing retraction of the "Trump trade." Based on the self-adjustment of U.S. policies and the long-term optimistic logic of the crypto market, we believe BTC is entering a good opportunity for medium to long-term allocation, and it can be cautiously increased in a stepwise manner.

Macro Finance: "U.S. Economic Recession" Expectations Drive Market Downward Pricing, Short to Medium Term May Continue to Face Pressure

The economic and employment data released by the U.S. government in February, along with the chaos caused by Trump's tariffs, have become two core factors influencing the recent trends in macro finance and the crypto market.

On February 7, the U.S. Bureau of Labor Statistics released core employment data, showing that the seasonally adjusted non-farm payrolls for January were only 143,000, significantly lower than the expected 170,000. The unemployment rate was 4%, slightly below the expected 4.1%. The significant reduction in non-farm payrolls has begun to intensify market expectations of a U.S. economic recession.

The CPI data released on February 12 showed that the January CPI month-on-month rate reached 0.5%, far exceeding the expected 0.3% and higher than December's 0.4%, pushing the annual rate above the expected 2.9% to 3%. Since then, U.S. inflation data has rebounded for three consecutive months, leading the market to firmly believe that the Federal Reserve has more reason to delay interest rate cuts. Even if economic recession expectations emerge, it may be difficult for the Fed to change its decision.

On February 21, the University of Michigan released the consumer confidence index for February, with a final value of 64.7, down from the initial value of 67.8, hitting a 15-month low. The continued low consumer confidence will inevitably transmit to the corporate side.

University of Michigan Consumer Confidence Index

Combined with previous negative information, this significantly unexpected data ultimately shattered market confidence. On that day, all three major U.S. stock indices experienced significant declines.

After two consecutive years of substantial gains, U.S. stocks, which were at historical highs, continued to decline sharply in the week following the 21st (Friday), erasing all gains for the month and continuing downward. The Nasdaq fell 3.97% for the month, the Dow Jones fell 1.58%, the S&P 500 fell 1.42%, and the small-cap index RUT2000 plummeted 5.45%. Both the Nasdaq and the S&P 500 fell below the 120-day moving average.

For traders, the continuous rebound in inflation and the potential decline in employment conditions have brought back the shadow of "economic recession," making it optimal to reduce long positions.

The crisis does not stop there. In addition to the deterioration of economic and employment data, Trump's chaotic and repetitive decisions regarding tariff policies have also left the market feeling confused and pessimistic.

In January, Trump signed a memorandum on the "America First Trade Policy," announcing at the end of the month a 25% tariff on goods from Mexico and Canada and a 10% tariff on Chinese goods (already implemented). He then announced a one-month delay in the implementation of tariffs on Canada and Mexico, only to directly announce on the last day of the month that they would take effect on March 4, along with an additional 10% tariff on China. During this period, Trump also claimed to implement reciprocal tariff policies against Europe and other countries.

Previously, the market viewed Trump's tariff policies as a political negotiation tool, but now they are quickly set to be implemented and have begun to become a significant factor driving inflation upward. This may also exceed market expectations, making traders increasingly pessimistic.

The only factor that could have a positive effect on inflation and interest rate cuts, the "Russia-Ukraine negotiations," made good progress for most of February, but on the last day of February, the two presidents had a dramatic conflict at a White House press conference, causing the mineral agreement that was to be signed to fall through. European leaders expressed support for Ukraine, and the rift between the U.S. and Europe is expected to deepen. The already certain "Russia-Ukraine war" has encountered new twists, making it difficult to end in the short term. Thus, the expectation of ending the war to increase oil production and reduce inflation has been significantly discounted.

Since November last year, the "Trump trade" was based on expectations of strong economic growth. Now, with poor employment data and persistently high inflation, coupled with tariffs exacerbating inflation expectations, market expectations have reversed, exiting the "Trump trade" and initiating pricing for "economic recession." Based on this logic, the decline of the three major stock indices may just be the beginning.

U.S. 10-Year Treasury Yield (Daily)

Since mid-January, the yield on the U.S. 10-year Treasury bond has continued to decline, dropping from a high of 4.809% to 4.210%. The significant change in the "pricing anchor" reflects the capital market's substantial downward revision of pricing for an economic recession.

With the rebound in inflation, signs of economic decline, and the sharp drop in the stock market and 10-year Treasury yields, market expectations for the Fed to cut interest rates this year have begun to rise again, increasing from 1 cut to 2 cuts. Technically, both the Nasdaq and the S&P 500 have fallen below the 120-day moving average. Given the current severe situation, the market has raised expectations for interest rate cuts, and if there is no positive response, short-term declines may continue.

Crypto Assets: "Trump Bottom" Breached, Medium to Long Term Welcomes Allocation Opportunity

In February, BTC opened at $102,414.05, closed at $84,293.73, with a high of $102,781.65 and a low of $78,167.81, falling 17.69% or $18,113.53 for the month, with a volatility of 24.03%. From the peak, it has dropped a maximum of 28.52%, recording the largest pullback since this cycle (January 2023).

BTC Price Trend (Daily)

Moreover, the monthly decline was concentrated in the last week, with a rapid short-term drop pushing the market into a state of extreme panic. Corresponding to the largest drop of the cycle, the Fear and Greed Index fell to 10 points on February 27, the lowest point since the current cycle, close to the 6 points during the previous cycle's bear market phase when LUNA collapsed.

Technically, the "Trump Bottom" (purple area in the above image) has been effectively breached, which also echoes the retraction of the "Trump trade" in U.S. stocks. The "first upward trend line" and "second upward trend line" that EMC Labs previously focused on have both been rapidly breached in a short time. By the end of the month, BTC's price closed near the 200-day moving average.

In addition to the correlation with U.S. stocks, the significant drop in the crypto market this month is also related to negative events within the market.

On February 14, Argentine President Javier Milei promoted the MEME coin Libra on the X platform, sparking a speculative frenzy that pushed its market value to $4.5 billion. Subsequently, the creator withdrew funds from the trading pool, leading to a rapid collapse in the coin's price, resulting in heavy losses for investors.

On February 21, suspected North Korean hackers exploited a technical vulnerability in the Bybit exchange, stealing over 400,000 ETH and stETH, with a total value exceeding $1.5 billion, marking the largest attack in cryptocurrency history in terms of USD.

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

Additionally, on March 1, the unlocking of SOL tokens due to the bankruptcy liquidation of FTX will reach 11.2 million, with a total value of only $2 billion. The unlocking scale accounts for 2.29% of the total issuance of SOL, pushing SOL's price down by more than 50% in a weak market.

EMC Labs assesses that the largest drop in the crypto market in February was directly caused by the decline in U.S. stocks driven by expectations of an economic recession, which can also be understood as a pricing retraction of the "Trump trade." Based on the extent of the drop in U.S. stocks, BTC could theoretically fall to around $73,000, but considering the positive impact of the Trump administration on BTC's fundamentals far exceeds that of U.S. stocks, the probability of reaching this theoretical low is relatively low. The cycle is still ongoing, and based on the self-adjustment of U.S. policies and the long-term optimistic logic of the crypto market, we believe BTC is entering a good opportunity for medium to long-term allocation, and it can be cautiously increased in a stepwise manner.

Funds: BTC Spot ETF Channel Outflows Exceed $3.2 Billion, Direct Cause of the Decline

With the cooling of the Trump trade sentiment, the inflow of funds into the crypto market in February has significantly slowed. This slowdown in inflow has interacted with the price decline, ultimately leading to BTC's price plummeting after lingering around the $96,000 mark for a long time in the last week of February. The inflow of funds in February dropped significantly to $2.111 billion.

Crypto Market Fund Flow Statistics (Daily)

Delving into the classified fund flows, EMC Labs found a divergence in attitudes between stablecoin funds and BTC Spot ETF channel funds. Stablecoin channels saw an inflow of $5.3 billion for the month, while ETF channel funds experienced an outflow of as much as $3.249 billion.

Crypto Market Fund Flow Statistics (Monthly)

In previous reports, we have repeatedly pointed out that the BTC Spot ETF has already gained control over BTC's short to medium-term pricing, thus making BTC's price movements highly correlated with U.S. stock trends.

This month, the BTC Spot ETF channel saw outflows exceeding $3.2 billion, becoming the most direct external cause of the decline, setting a record for the largest single-month sell-off since its listing. The subsequent movement of BTC will mainly depend on the improvement of U.S. economic expectations and the return of funds to the BTC ETF Spot channel.

Secondary Sell-off: Bloodied Chips from Short-Handed Groups

Since the initiation of the secondary sell-off in early October 2024, 1.12 million BTC chips have shifted from long-handed to short-handed holdings. We view the secondary sell-off as a necessary condition for the end of a bull market cycle, with the underlying logic being that once the active state of BTC grows to a certain extent, it will drain liquidity, leading to the complete destruction of the upward trend.

Examining the consolidation and sudden drop in February, long-handed groups maintained an extremely restrained state, selling only 7,271 BTC. In fact, the existing long-handed groups have long ignored the quotes in the "Trump Bottom" range ($89,000~$110,000), choosing to hold their coins for a rise.

In the last week of February, the bloodied chips that were transferred came from short-handed groups. According to on-chain data analysis, until February 24, short-handed groups were still holding firm, but the breach occurred on the 25th, resulting in an on-chain loss of $255 million for short-handed groups on that day. This was the second-largest loss day of this cycle, only behind August 5, 2024 (on-chain loss of $362 million). Historically, after short-handed groups experience similar large-scale losses, the market often welcomes a phase bottom.

On-Chain Loss Scale Statistics of Long and Short-Handed Groups

In-depth on-chain analysis reveals that since February 24, the distribution of BTC in the $78,000~$89,000 range has increased by 564,920.06 BTC, while the distribution of BTC in the "Trump Bottom" range ($89,000~$110,000) has decreased by 412,875.03 BTC.

BTC Price Distribution Statistics

The "Trump Bottom" range was completed between November last year and February this year, and the holders in this range belong to the typical short-handed group. The sell-off of bloodied chips by the short-handed group attempts to build a mid-term bottom and solidifies the range of $73,000~$89,000, which has relatively fewer chips.

Conclusion

In the January report, we emphasized that "the greatest external uncertainty comes from the chain reaction formed by the implementation of Trump's economic policies on interest rate cut expectations and capital supply. Once liquidity is constrained, volatility will rise significantly."

This concern has indeed come true.

According to our previous analysis, the sell-off of bloodied chips comes from short-handed groups, while long-handed groups have quietly slowed their selling and are waiting for a rise. EMC Labs assesses that the current bull market is only in a continuation state, not transitioning to a bear market.

We judge that the largest pullback event of BTC in February was caused by the significant outflow of funds from the BTC Spot ETF driven by the downward pricing of U.S. stocks at historical highs due to "economic recession expectations." The turning momentum will also come from the shift in expectations and trend rebound in the U.S. stock market.

With a relatively stable internal structure, BTC and the crypto market are still operating within the cycle rate, and the short-term price decline presents a good opportunity for medium to long-term allocation.

It is necessary to cautiously observe the trends in the U.S. macro economy, market expectations, and the Federal Reserve's attitude toward restarting interest rate cuts.

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EMC Labs was established in April 2023 by cryptocurrency investors and data scientists. It focuses on blockchain industry research and investments in the crypto secondary market, with industry foresight, insights, and data mining as core competencies, aiming to participate in the thriving blockchain industry through research and investment, promoting the benefits of blockchain and crypto assets for humanity.