Second-quarter 2022 gross domestic product (GDP) was down 0.9% from a year ago, showing the U.S. is technically in a recession, but you wouldn't know it from the market's reaction today. Crypto markets are moving higher across the board as investors pile back into riskier assets.
On Wednesday, the Federal Reserve raised short-term interest rates by 75 basis points to a target range of 2.25% to 2.5%. This was what the market expected, but there was a swift reaction pushing crypto values higher following the announcement. Traders currently expect the short-term treasury rate to be 3.5% by the end of 2022.
This morning, the U.S. Department of Commerce said GDP shrank by 0.9% in the second quarter following a 0.1% drop in the first quarter of 2022. This means the U.S. is in a technical recession, after two straight quarters of GDP declines.
A combination of higher interest rates and slowing GDP is seemingly bad for markets, but both the stock market and crypto markets are looking forward. There seems to be clarity around how the Federal Reserve is going to handle inflation, which it has said it's taking very seriously, and how this technical recession is impacting companies. Even with a slowdown in economic activity, there are pockets of strength, so this may not be a crushing recession. After months of uncertainty, that was enough to cause investors to flood back into riskier assets.
On the trading side, there seems to be a short squeeze taking place today as well. Coindesk reported that there have been $200 million in short positions liquidated in the last 24 hours, which is the opposite of what was happening when the market was crashing. Leveraged positions cause a lot of the volatility in crypto and today that's working to push prices higher.
News about interest rates or GDP won't fundamentally change what's being built in Web3 and crypto, but it does change how traders are viewing risky assets. Right now, they're bidding up both growth stocks and cryptocurrencies, which is evident in the move today. But keep in mind that this trend can flip just as quickly if the market sentiment changes.
I'm encouraged by the price increase in crypto over the last month as the industry recovers from multiple bankruptcies, including multibillion-dollar hedge fund Three Arrows Capital. Developers continue to build on blockchains as well, which will increase utility over the long term. If you're willing to hold through the volatility, cryptocurrencies like Bitcoin, Ethereum, and Polkadot could do well, but it'll be a bumpy ride.