Why All Investors Will Feel the Pain of Crypto Carnage

The note adds that “in absolute terms, bitcoin’s spillover to global equity markets is large, explaining about 14-18% of the variation in equity price volatility and 8-10% of the variation in equity returns. “.

The note points out that crypto has now moved from the periphery to the mainstream as an asset class, and is increasingly found alongside traditional assets such as stocks and bonds in the investment portfolios of companies. individual and institutional investors. And this has led to increased integration between the crypto and equity markets.

“Bitcoin price movements are associated with a sizable portion of US stock price change,” the note said. “Specifically, bitcoin price volatility explains about one-sixth of the volatility of US equity indices, while bitcoin returns explain about one-tenth of the variation in US stock returns.”

More pain is on the way

This suggests that investors around the world will feel the bitter effects of the carnage in crypto markets, which has wiped out billions of dollars of value as confidence plummets and liquidity disappears.

Already, global financial conditions have tightened significantly, as the US Federal Reserve grapples with the highest inflation in four decades, pushing the US equity market deep into bear territory.

But investors now fear that global stock markets will feel even more pain if investors dump stocks to offset their mounting crypto losses.

The total value of the crypto market has now fallen to around $800 billion, from a high of $3.2 trillion last November, as the prices of digital currencies such as bitcoin and ether have plunged.

Hundreds of thousands of shocked retail traders have had their crypto investments liquidated after they failed to meet margin calls to top up their security on loans they took out to buy digital currencies.

Even more worrying are the huge contagion risks that are now becoming apparent within the crypto industry, as turmoil in the sector has prompted some crypto lenders to suspend or limit redemptions.

A week ago, Celsius Network, one of the largest lenders in the crypto world with nearly $12 billion in deposits, announced that it would no longer allow customers to withdraw money from their accounts. due to extreme market conditions.

Other crypto platforms are taking similar action. Crypto savings app Finblox has imposed a limit on withdrawals and stopped paying interest due to uncertainty over the future of crypto hedge fund Three Arrows Capital, which backed the company.

Hong Kong-based Babel Finance, another crypto lender, suspended withdrawals on Friday due to what it described as “unusual liquidity pressures.”

Crypto lenders have thrived over the past few years by offering tempting returns that have eclipsed the interest rates available from regulated banks. Celsius, for example, has paid clients annual percentage returns of up to 18.6% on crypto deposits.

Typically, crypto lenders lend these deposits to other crypto investors, providing them with capital to make crypto bets. They also frequently invested customer deposits in high-yield, high-risk decentralized financial investments, or DeFi.

Worrying signs

But the $60 billion implosion last month of what was supposed to be a top-notch cryptocurrency, TerraUSD, has investors worried. TerraUSD was a stablecoin, which was designed to maintain its value of US$1 per coin.

Instead of being backed by cash or US bonds, TerraUSD’s supposed stability relied on algorithms that tied its value to a sister cryptocurrency called Luna.

After witnessing the fall of TerraUSD and Luna, investors increasingly wanted to get their money back from crypto lenders.

But that created a problem for Celsius, which had placed some of the deposits in relatively illiquid investments that had fallen in value. It also faced pressure to increase collateral on the loans it had taken out, which created additional liquidity spots.

If clients continued to withdraw their deposits, Celsius would have had no choice but to dump its investments at a substantial loss, triggering further declines in crypto prices and causing a cascade of losses across the industry.

Nonetheless, the move by crypto lenders to impose checks on withdrawals has fueled a new bout of nervousness in the crypto world.

Crypto lenders, of course, aren’t the only players suffering from the receding tide of liquidity.

Last week, high-profile crypto hedge fund Three Arrows failed to respond to a margin call from lenders to complete loan security after its high-leverage bets on crypto turned sour.

As a result, lenders, including two of the biggest crypto financial services groups – BlockFi and Genesis – sold the assets that Three Arrows had pledged as collateral for their loans.

According to the wall street journalThree Arrows has hired legal and financial advisers to help find a solution for investors and lenders, which could involve the sale of assets or a bailout by another company.

“Not the first hit”

In an interview with the the wall street journalKyle Davies, the co-founder of the hedge fund, said Three Arrows was able to withstand the losses from its $200 million investment in Luna, but the sharp decline in bitcoin, ether and crypto prices. other cryptocurrencies had created more problems.

Davies added that Three Arrows is still trying to quantify its losses and assess its illiquid assets, which include venture capital investments in dozens of private crypto-related businesses and startups.

“We weren’t the first to be affected… This is all part of the same contagion that has affected many other businesses,” he said.

As if to prove his point, the contagion effects of Three Arrows’ troubles have already been felt by crypto savings app, Finblox, which is one of the crypto exchanges that has capped withdrawals.

Investors are only just beginning to understand the extent of the contagion risks within the crypto industry, not to mention the amount of crypto pain that will ripple through the stock market.

#Investors #Feel #Pain #Crypto #Carnage

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