Don’t Look Down: Macroeconomic Warnings for Crypto

This article is brought to you by FBS.

Have you ever paid attention to the behavior of 10-year and 2-year bond yield curves when forecasting the crypto market? The difference between 10-year and 2-year bonds is a spread and is a strong indicator for determining the future behavior of the market and the Fed, which will help predict the behavior of investors regarding the crypto market.

In normal functioning market conditions, you would expect a yield curve to be sloped upwards, i.e. the yield on short-term bonds is lower compared to long-term bonds. Amongst other things, this is mainly due to duration risk – that holders of longer term debt are taking on more risk. However during times of economic stress, yield curves can invert, i.e. the yield for short-term bonds become higher than longer-term bonds, indicating that investors are pessimistic about the near-term outlook of the economy and are moving their holding to longer durations. Yield curve inversions are sometimes taken as a signal of an economy entering a recession, though it is not always the case historically.

After a prolonged inversion of the spread between 10-year and 2-year US Treasury bond yields, 2025 marks a clear shift toward normalization. Historically, such turning points coincide with major changes in the economy and investment regime. For cryptocurrencies, this moment could mark the end of the liquidity squeeze and the beginning of a new market cycle.

What the End of the Inversion Signifies

The negative difference between 2-year and 10-year bond yields suggests that the market expects the economy to go bad. Investors do not believe in sustainable growth and start shifting money into long-term bonds. Due to high demand, the price of the 10-year bonds is rising and yields are falling. At the same time, short-term bonds remain at high yields because the Fed's key rate is still at a high level. This created an inversion. Technically, investors are shifting capital from equities and risk assets to US Treasuries and defensive instruments in anticipation of a possible recession and inflation.

When the yield inversion corrects itself, it is a signal that confidence in the economy is returning. Investors leave protective assets and return to riskier ones - shares, crypto - expecting economic growth and lower interest rates.

In 2023–2024, the inversion reached its deepest levels in decades. Now, the spread between 10Y and 2Y is rebounding, and that shift is just as significant.

Historically, a recovery in the yield curve does not mean the end of an economic downturn, but often signals its official onset (or final, visible phase). Recessions tend to follow, rather than precede, the normalization phase. This makes central bank policy, especially that of the Federal Reserve, even more important at this stage.

Why It Matters for Crypto

The cryptocurrency market is very sensitive to macroeconomic shifts, especially changes in monetary policy. While the yield curve was in inversion in 2022 to 2023, the US economy did not enter into a recession. However during this period of high inflation, the Fed was forced to raise interest rates, draining liquidity from the market which strongly impacted cryptocurrency prices.

As the yield curve normalizes, markets are increasingly pricing in a future Fed rate cut. Trump's increasing pressure on Jerome Powell is adding fuel to the fire of expectations of monetary easing. The latest CPI data confirms that inflation is slowing and the Fed now has a clearer plan of action.

This environment creates new growth opportunities for digital assets. Historically, cryptocurrencies have thrived during easing cycles – just look at the jump from $4,000 to $60,000 in 2020-2021.

Could Crypto be the First Beneficiary of Rate Cuts?

Unlike traditional equities, crypto assets are more flexible and subject to changes in liquidity and cost of capital. If the Fed begins easing policy later this year, digital assets could be among the first to benefit.

For example, in 2020, when the Federal Reserve started cutting interest rates, the S&P500 index rose 63% over 3 years, while Bitcoin rose by over 500%.

The combination of a normalizing yield curve, slowing inflation and heightened political uncertainty in the US could further strengthen the position of crypto assets.

Bitcoin Forecast

On the weekly timeframe, we see Bitcoin has started to work out a bullish pattern – a cup and handle. The price is currently testing the resistance at 105000.

If this crucial resistance level is broken, the next target will be the 157000 level coinciding with the 2.618 Fibonacci. In an optimistic scenario, the price could reach the second target at 240000 and 4.236 Fibonacci.

Altcoins Forecast

Looking at the Altcoin Index to identify the current sentiment. The Altcoin Season Index measures how well altcoins are behaving relative to bitcoin, signaling potential changes in the market. When the majority of altcoins outperform bitcoin and bitcoin's dominance falls, it could signal the start of “altcoin season,” a period characterized by increased trading volume, volatility, and investor interest in alternative cryptocurrencies such as Ethereum and Ripple. 

While we experienced a short-lived altcoin season at the end of last year, bitcoin seems to have regained its dominance. However periods like this may be an opportunity to accumulate altcoins, which could see stronger rebounds as the pendulum swings back.

Conclusion

The reversal of the yield curve inversion is not just a macro signal, it is a potential beginning of a new economic phase. For cryptocurrency markets, this could mean the end of stagnation and the beginning of a new growth cycle. How quickly this happens will depend on the decisions of central banks, the trajectory of inflation and political stability. However, a shift towards an easing macroeconomic environment may be in favor of digital assets.

This article is by FBS analysts and is not intended to serve as investment or financial advice. Always do your own research before investing in any cryptocurrency.