February Financial Market Review: Shadows of Economic Recession Reemerge, Crypto Assets Suffer Heavy Losses

The global financial market experienced a dramatic turn in February, especially as the sharp changes in the U.S. macroeconomic situation raised concerns among investors.

U.S. inflation data unexpectedly rose, and consumer confidence fell to a 15-month low, factors that together drove the market's expectations of an economic recession. Traders began to price in a potential economic downturn, causing the three major U.S. stock indices to quickly drop near the 120-day moving average.

Against this backdrop, risk aversion has intensified, the yield on the 10-year U.S. Treasury bond has quickly fallen, and gold prices have also shown signs of peaking.

Affected by the decline in the US stock market, Bitcoin experienced a significant drop in the last week of February, setting the largest single-week decline and loss since this cycle began.

The analysis suggests that this wave of market activity is essentially a correction of the previous "Trump trade" pricing. However, based on the possible self-adjustment of U.S. policies and the long-term outlook of the crypto market, the current time may present a good opportunity for medium to long-term positioning in Bitcoin, and investors may consider cautiously building their positions in batches.

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

The economic and employment data released by the U.S. government in February, along with the uncertainty caused by Trump's tariff policy, have become two key factors affecting the trends in the macro-financial and Crypto Assets markets recently.

The core employment data released in early February showed that the non-farm payrolls increased by only 143,000 in January, far below the expected 170,000. The unemployment rate was 4%, slightly lower than the expected 4.1%. The significant slowdown in job growth has intensified market concerns about a potential recession in the U.S. economy.

The subsequently released CPI data showed that the January CPI month-on-month rate reached 0.5%, far exceeding the expected 0.3%, and also higher than December's 0.4%, pushing the annual rate to 3%, above the expected 2.9%. This marks the third consecutive month of rebound in U.S. inflation data, strengthening the market's expectation that the Federal Reserve may delay interest rate cuts. Even if signs of economic recession emerge, it is difficult to change the Federal Reserve's policy stance.

The consumer confidence index released in late February further undermined market confidence. The final value of the consumer confidence index in the United States for February was 64.7, down from the initial value of 67.8, hitting a 15-month low. The continued low consumer confidence will inevitably affect business operations.

These negative data compounded, ultimately leading to a collapse of market confidence. The three major U.S. stock indices continued to decline sharply in the week following February 21 (Friday), erasing all gains made this month. The Nasdaq index fell 3.97% for the month, the Dow Jones Industrial Average fell 1.58% for the month, the S&P 500 index fell 1.42% for the month, and the Russell 2000 index, which tracks small-cap companies, dropped 5.45%. Both the Nasdaq and the S&P 500 fell below the 120-day moving average.

For market participants, the continuous rebound of inflation, the potential deterioration of the employment situation, and the shadow of economic recession once again loom, making it seem like reducing long positions is the wisest choice.

In addition to the deterioration of economic data, Trump's unpredictability in tariff policies has also exacerbated market confusion and pessimism. Trump first signed a memorandum on the "America First Trade Policy," announcing tariffs on Mexico, Canada, and China, and then repeatedly changed the implementation dates and tax rates. This uncertainty in policy has become another significant factor pushing inflation higher, exceeding market expectations and making traders more pessimistic.

The "Russia-Ukraine negotiations" that could have positively impacted inflation and interest rate cuts made good progress for most of February, but the dramatic conflict between the two presidents at a White House press conference at the end of the month led to the collapse of the scheduled mineral agreement. European leaders expressed support for Ukraine, and the rift between the US and Europe may further deepen. This conflict, which could have potentially ended, has resurfaced, making it difficult to conclude in the short term. Therefore, the expectation of reducing inflation by increasing oil production through the end of the war has been greatly diminished.

Since last November, the "Trump trade" has been based on expectations of strong economic growth. Now, with weak employment data, high inflation, and tariffs exacerbating inflation expectations, market expectations have reversed, leading to an exit from the "Trump trade" and a shift towards pricing in a "recession." Based on this logic, the decline of the three major stock indices may just be the beginning.

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

With the rebound in inflation, signs of economic recession, and significant declines in the stock market and 10-year Treasury yields, market expectations for the Federal Reserve to cut interest rates this year have increased again, with the expected number of cuts rising from 1 to 2. From a technical perspective, both the Nasdaq index and the S&P 500 index have fallen below the 120-day moving average. Given the current severe situation, the market has raised its expectations for interest rate cuts, and if there is no positive response, it may continue to decline in the short term.

Crypto Assets: Trump's bottom has been breached, medium to long-term allocation opportunities are emerging.

In February, the opening price of Bitcoin was $102414.05, the closing price was $84293.73, the highest reached $102781.65, and the lowest fell to $78167.81. The total decline for the month was 17.69%, with a drop of $18113.53, and the volatility was 24.03%. The maximum decline from the peak reached 28.52%, marking the largest drawdown in this cycle (since January 2023).

It is worth noting that the decline for the entire month was concentrated in the last week, and the sharp drop in the short term has plunged the market into a state of extreme panic. Corresponding to the maximum drop of the cycle, the Fear and Greed Index fell to 10 points on February 27, hitting the lowest point of this cycle, close to the 6 points during the previous cycle's bear market phase when LUNA collapsed.

From a technical perspective, the support area previously known as the "Trump Bottom" has been effectively broken, which corresponds to the U.S. stock market's pullback from the "Trump Trade." The "first upward trend line" and "second upward trend line" that were previously focused on have both been quickly breached in a short period of time. By the end of the month, the price of Bitcoin closed near the 200-day moving average.

In addition to being correlated with the US stock market, the significant cyclical decline in 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 that pushed its market value to $4.5 billion. Subsequently, the creator withdrew funds from the trading pool, causing the coin's price to collapse rapidly, leading to significant 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, totaling more than $1.5 billion, making it the largest attack in the history of Crypto Assets measured in US dollars.

In addition, a certain smart contract platform was attacked, with stolen funds exceeding $49 million.

In early March, due to the bankruptcy liquidation of a certain Crypto Assets exchange, the unlocking of SOL tokens will reach 11.2 million, with a total value of approximately $2 billion. The scale of the unlocking 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.

Analysis suggests that the largest decline in the crypto market this cycle in February was directly caused by the drop in U.S. stocks driven by recession expectations, which can also be understood as a pricing correction for the "Trump trade." Based on the decline in U.S. stocks, Bitcoin could theoretically drop to around $73,000, but considering the significant improvement in Bitcoin's fundamentals since the Trump administration took office, this theoretical low point is less likely to be realized. The cycle is still ongoing, and based on the logic that U.S. policies may self-adjust and the long-term outlook for the crypto market is positive, this may be a good opportunity for medium to long-term positioning in Bitcoin. Investors can cautiously accumulate positions in batches to go long.

Capital Flow: Bitcoin Spot ETF Net Outflow Exceeds $3.2 Billion, Becoming a Direct Cause of the Decline

With the cooling of trading sentiment around Trump, the inflow of funds into the crypto market in February significantly slowed down. This slowdown in inflow interacted continuously with the price decline, ultimately leading to a sharp drop in Bitcoin's price after it consolidated for a long time around the $96,000 level in the last week of February. The scale of fund inflow in February dropped significantly to $2.111 billion.

In-depth analysis of different categories of funds reveals a divergent attitude between stablecoin funds and Bitcoin spot ETF funds. Stablecoin channels saw an inflow of 5.3 billion dollars throughout the month, while ETF channels experienced a net outflow of 3.249 billion dollars.

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

This month, the outflow from Bitcoin spot ETF channels exceeded $3.2 billion, becoming the most direct external reason for the decline and setting the record for the largest single-month sell-off since its listing. The future trend of Bitcoin mainly depends on the improvement of economic expectations in the United States and the inflow of funds into Bitcoin ETFs.

Secondary Sell-off: Short-term Investors Become the Main Selling Group

Since the second sell-off started in early October 2024, approximately 1.12 million coins have been transferred from long-term holders to short-term holders. The second sell-off is seen as a necessary condition for the end of a bull market cycle, with the underlying logic being that once the scale of active Bitcoin grows to a certain extent, it will exhaust liquidity, leading to a complete breakdown of the upward trend.

In February, long-term holders maintained a state of extreme restraint, selling only 7,271 coins. In fact, the existing long-term holders are no longer focused on the "Trump Bottom" price range (89,000~110,000 USD), choosing to hold their coins and wait for the price to rise.

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 held on until February 24, but on the 25th, a large-scale sell-off occurred, resulting in a loss of $255 million for on-chain short-term holders in just that day. This was the second largest loss day in this cycle, following August 5, 2024 (with an on-chain loss of $362 million). Historical experience indicates that after short-term holders experience a similar scale of large losses, the market often welcomes a phase bottom.

In-depth on-chain analysis reveals that since February 24, the number of bitcoins in the price range of $78,000 to $89,000 has increased by 564,920.06 coins, while the number of bitcoins in the "Trump bottom" range ($89,000 to $110,000) has decreased by 412,875.03 coins.

Holders in the "Trump Bottom" range belong to the typical short-term investment group. The selling of loss-making chips by short-term holders attempts to build a mid-term bottom, which also consolidates the price range of 73000~89000, where there are relatively few chips.

Conclusion

The January report emphasized that "the biggest external uncertainty comes from the chain reaction formed by expectations of interest rate cuts and capital supply after the implementation of Trump's economic policies. Once the liquidity of funds...