What is the Connection Between Recent Downtrend and "Non-Farm Payrolls Night"?

The festive atmosphere at the beginning of 2022 doesn't seem to be reflected in Bitcoin's market performance. According to OKX market data, as of press time, Bitcoin's price has fallen below $41,000, marking a decline of over 10% from its January 1 high of $48,000. The primary driver behind Bitcoin's and the crypto market's persistent downtrend since the start of the year is naturally the strengthening expectation of Federal Reserve rate hikes, which has long been the industry's biggest headwind.

Since 2020, mainstream institutions represented by Grayscale and MicroStrategy have begun making large-scale allocations to Bitcoin and other digital assets, with holdings continuously hitting new highs. Data shows that in 2021, 38 publicly traded companies worldwide held 237,606.01 Bitcoin, accounting for over 1% of Bitcoin's global circulation, with a market value exceeding $10 billion.

Old Money entering the market may not change the decentralized nature of digital assets, but it has caused their macro trends to gradually align with traditional financial market movements. Corresponding to the digital assets bull market that began in late 2020, US stock market valuations were at overall highs in 2021, with the common driving force behind both being the Federal Reserve's initiation of the QE (quantitative easing) cycle.

Therefore, the Federal Reserve's policy moves have become a barometer for global financial markets, including the crypto market.

This Wednesday, the Federal Reserve released the minutes from the December Federal Open Market Committee (FOMC) monetary policy meeting. The minutes showed that participants noted that given the economic, labor market, and inflation outlook, it may be necessary to raise the federal funds rate earlier or at a faster pace than previously expected. Affected by this, Bitcoin has already broken below the two key indicators MA200 and MA240 yesterday, strengthening bearish expectations. Additionally, after the meeting minutes were released, US stocks accelerated their decline. The Dow Jones fell 392.54 points, or 1.07%, marking its largest drop since December 20, 2021. The S&P 500 fell 1.94%, barely holding above 4700 points, its largest decline since November 26, 2021. The Nasdaq fell 3.34%, its largest drop since February 25, 2021.

I. The Federal Reserve's Decision Hasn't Landed Yet - "Non-Farm Payrolls Night" Holds More Reference Value

The US macroeconomic trend, composed of various indicators including inflation rate, employment rate, GDP growth, and import/export volumes, determines the Federal Reserve's policy direction and influences capital market performance. As an intuitive measure of US employment conditions, the non-farm payrolls index more directly reflects economic health, thereby affecting the prices of various financial assets. The US Department of Labor's Bureau of Labor Statistics releases the previous month's non-farm payrolls data on the first Friday evening of each month at 8:30 PM (daylight saving time) or 9:30 PM (standard time) Beijing time - that evening is also known as "Non-Farm Payrolls Night." The evening of January 7 is 2022's first "Non-Farm Payrolls Night," to which investors should pay special attention.

Let me explain specifically what the non-farm payrolls index is, and the interconnected relationship between non-farm payrolls and Federal Reserve policy.

The US non-farm payrolls index refers to the US non-agricultural employment index and non-farm employment count. It can reflect development and growth in the manufacturing and service sectors. A decreasing number indicates that enterprises are reducing production, employment in secondary and tertiary industries is declining, and the economy is entering a depression. When social and economic growth is rapid, consumption naturally increases, and positions in consumer and service industries increase. Therefore, the higher the non-farm payrolls index, the better the economic performance, and the greater the probability of rate hikes. Conversely, a declining non-farm payrolls index means weak consumption and labor markets, and cutting rates to stimulate the economy may become the policy of choice.

The Federal Reserve's two monetary policy goals have long been price stability and full employment, with price stability long being the top priority and the primary focus of the Federal Reserve. However, under the circumstances where the COVID-19 pandemic caused US unemployment numbers to repeatedly hit record highs, the primary reference for US economic policy has shifted from maintaining price stability to preserving employment. The massive monetary stimulus by US authorities in 2020 was based precisely on the consideration of increasing employment rates to drive economic growth. With the approach of a new rate hike cycle, the directional significance of the latest non-farm payrolls data is particularly evident compared to previous years.

Looking back, every day when non-farm payrolls data is released causes major earthquakes in global financial markets, with huge market volatility, which is why that evening is called "Non-Farm Payrolls Night." 2022's first "Non-Farm Payrolls Night" happens to coincide with the beginning of the Federal Reserve's rate hike cycle, and its impact on traditional capital markets goes without saying. How will it affect the crypto market? Is there historical data for corroboration? Are there other influencing factors in the recent continued market weakness?

II. What is the Correlation Between Non-Farm Payrolls and Crypto Market Performance?

According to the previous analysis, theoretically, non-farm payrolls directly influence Federal Reserve policy. According to a precious metals mid-year report from Fangzheng Futures released in July 2021: when US non-farm payrolls performance falls short of expectations, the market believes the Federal Reserve's discussion and release of tapering bond purchases will be delayed, rate hike expectations decrease, leading to higher gold prices.

Bitcoin is known as "digital gold" and, like gold, possesses "safe-haven asset" attributes. Its price trend is also negatively correlated with the non-farm payrolls index. For example, in August 2021, US non-farm employment increased by only 235,000, the smallest increase since January 2021, far below economists' expectations of 730,000. After the data was released, the US dollar plunged, with the dollar index briefly falling below 92, while gold surged 1% and Bitcoin briefly surged nearly 4% intraday, returning above the $51,000 mark and reaching its highest level since May.

However, in December 2021, just past, the situation was exactly the opposite. At 21:30 Beijing time on December 3, the US November non-farm payrolls report released significantly underperformed expectations, with the increase hitting a yearly low, though the unemployment rate dropped considerably. Among this, new employment was 210,000, far below analysts' average expectations of 573,000; the unemployment rate further declined to 4.2%, exceeding market expectations of 4.5%.

The moment the data was released, Bitcoin experienced a brief rapid rise, reaching a high of $57,617 (OKX data), then began a sustained decline mode, hitting an intraday low of $41,209. Other digital assets also followed Bitcoin in sustained declines, with most drops exceeding 20% or even 30%, with the entire market showing across-the-board "red."

In fact, not only did the crypto market decline, but the three major US indices - Dow Jones, Nasdaq, and S&P 500 - all closed lower, with the Nasdaq briefly falling more than 2.5% during trading.

At that time, analysis suggested that uncertainty regarding the Omicron variant was very high, and combined with disappointing employment data, US stock investors decided to sell before the weekend. This undoubtedly affected the crypto market, a scene that reminded many "old investors" of the "3.12" crash triggered when the COVID-19 pandemic first ravaged the globe in 2020. The root of all this was the rise in non-farm payrolls, providing decision-making basis for the Federal Reserve to implement rate hike policies earlier and faster.

However, opposite situations often occur, that is, when non-farm employment data is below expectations or below previous values, the US dollar and gold rise simultaneously. Such trends prominently highlight another function of the US dollar - safe haven - reminding crypto investors to treat patterns cautiously and consider the combined effects of multiple influencing factors.

Worth noting is that around this Wednesday's release of the Federal Reserve minutes, "hawkish" rhetoric was frequent, exacerbating market panic. Among these, more authoritative and representative comments include:

Federal Reserve Chair Powell stated that economic developments and prospects justify accelerating bond tapering, rising inflation is the reason for accelerated tapering, and QE is expected to end by mid-March 2022;

"Hawkish" representative and St. Louis Federal Reserve President Bullard believes rate hikes could come as soon as March; "dovish" representative and Minneapolis Federal Reserve President Kashkari pointed out that the Federal Reserve needs to raise rates at least twice in 2022 to address inflation; "Commodity King" and renowned investor Dennis Gartman is even more pessimistic, believing the Federal Reserve will raise rates four times this year and US stocks could fall 10% to 15% this year.

Additionally, among 18 Federal Reserve officials, 12 officials expect three rate hikes in 2022, and 11 officials expect another three rate hikes in 2023. Regarding timing, Chicago Mercantile Exchange data shows the market broadly expects the Federal Reserve to raise rates for the first time as early as March this year, with a second rate hike in June or July, and complete a third rate hike in November or December.

Therefore, if the non-farm payrolls index for last month released on the evening of January 7 is relatively high, rate hike expectations may be more significant, potentially shaking the foundation of the bull market. Conversely, rate hikes may be delayed, extending the current bull market cycle. However, judging from current market sentiment, panic has already taken hold.

According to alternative.me data, from January 4 to 6, the market fear and greed index was 29, 23, and 24 respectively, all at extreme fear levels. Additionally, OKX market data shows that as of 2 PM on January 7, Bitcoin briefly fell below $41,000, hitting a low of 40,981.4 USDT. It is currently trading at 41,371 USDT, down 3.67% today. CoinGlass data shows total liquidations of $441 million in the past 24 hours, and $140 million in the past hour.

Worth noting is that yesterday's unrest in Kazakhstan can be viewed as the crypto world's first "black swan event" of 2022. During the day on January 5 Beijing time, after protesters stormed government buildings complaining about soaring energy costs, causing Kazakhstan's largest telecommunications provider Kazakhtelecom to shut down nationwide internet access, the hash rates of numerous Bitcoin mining pools declined. According to the Cambridge Alternative Finance Center's estimates last fall, Kazakhstan holds 18% of global Bitcoin computing power, which has had a certain impact on Bitcoin supply and constitutes bearish news for market performance.

III. Amid Bull-Bear Transition, Crypto Market's Internal Factors May Be More Critical

Looking at the historical performance of traditional capital markets, systemic bull and bear markets have become rare, with more differentiation and structural characteristics appearing within overall bull-bear cycles. Because internet technology has eliminated information asymmetry, while gradually meeting consumers' personalized needs overall, it drives industry specialization, thereby creating "independent performance" based on specific markets. For example, under the long bull market theme of US stocks, traditional energy sectors like coal appear somewhat sluggish, primarily due to the rapid development of the new energy industry and the widespread adoption of shale oil in the US under the carbon neutrality background.

The crypto market, with traditional capital's entry, has acquired the attributes of mainstream financial assets. Amid bull-bear transition, a few concepts and sectors still show strong performance. For instance, hotspots like NFT and Web3 have still been eye-catching recently.

Among these, leading NFT trading platform OpenSea's total trading volume reached $15.1 billion, with total trading fee revenue of $377 million. Additionally, OpenSea has raised over $427 million to date, with a valuation of $13.3 billion. Recently, OpenSea's Google search index has repeatedly hit new highs, highlighting NFT's breakout effect;

Google invested $40 million in Hon Hai Precision's subsidiary Hannspree, joining forces to enter the metaverse market;

The relay service of Pocket Network, a Web3.0-based blockchain cloud computing ecosystem, increased from 3.8 billion in November last year to 5.5 billion in December, up 44%; its node count approaches 20,000, growing approximately 300% in 5 months, and yesterday it completed $10 million in financing, having integrated networks including Solana, Ethereum, Polygon, Avalanche, Binance, xDai and Fuse, with over 20 public chains and thousands of DApps using its infrastructure.

The heating up of NFT and Web3.0 sectors precisely indicates that the boundaries between the traditional internet world and blockchain technology are gradually blurring, replaced by more on-chain applications that may enter real life rather than the hollow concepts of before. This will effectively hedge against market volatility and uncertainty.

Additionally, on January 6, the third-ranked Bitcoin whale address added 179 Bitcoin again, and the 28th-ranked Bitcoin giant whale added 1,000 Bitcoin. Bridgewater founder Dalio also expressed that allocating 2% of an investment portfolio to Bitcoin is reasonable. These news items mean that whether in crypto circles or traditional circles, not all large holders are exiting, so future markets cannot be ruled out for rebounds, though overall uncertainty is strengthening.

Non-farm payrolls and Federal Reserve policy are essentially external factors in crypto market development. In any industry still in its early stages, external factors are often decisive conditions to some extent, due to insufficient maturity. However, with the vigorous development of the crypto market, the effectiveness of force majeure factors like macro policy may be weakened. Internal factors including application scenarios, technical efficiency, user scale, and business models may gradually become the determining factors for crypto projects and market performance. Just recently on November 8, 2021, the total market capitalization of crypto assets exceeded $3 trillion for the first time, demonstrating the industry's growth potential. Therefore, quality projects and sectors that can traverse bull and bear markets, eagerly awaited by global users, may come to fruition in the not-too-distant future.

Of course, any investment behavior involves making judgments and choices based on expectations. Before the Federal Reserve's decision lands, the "non-farm payrolls index" on the evening of January 7 may have a direct or indirect significant impact on the overall market. What investors need to do is learn to analyze all potential influencing factors amid successive market rotations, and make rational investment decisions combining specific internal and external conditions, earning returns within their scope of understanding.

Disclaimer

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What is the Connection Between Recent Downtrend and "Non-Farm Payrolls Night"?

What is the Connection Between Recent Downtrend and "Non-Farm Payrolls Night"?

I. The Federal Reserve's Decision Hasn't Landed Yet - "Non-Farm Payrolls Night" Holds More Reference Value

II. What is the Correlation Between Non-Farm Payrolls and Crypto Market Performance?

III. Amid Bull-Bear Transition, Crypto Market's Internal Factors May Be More Critical

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