Sam Bankman Fried

Crypto is in crisis It’s not because of FTX

Last week, shockwaves erupted in the crypto world when the shocking collapse of FTX, the largest cryptocurrency exchange, occurred. The 30-year-old crypto giant and chief executive at FTX, Sam Bankman-Fried saw billions of his fortune disappear in a bankruptcy filing that rocked the trillion-dollar industry to the core. Investors are likely to feel the pain again.

What’s Happening: JPMorgan analysts now predict a 25% drop in bitcoin prices over the next few weeks.

This is partly due to the ongoing fallout from FTX and a different challenge that has been hitting crypto already. Since June, the Federal Reserve has been shrinking its balance sheet, removing money from financial markets to cool down the economy’s fight against inflation. Capital is being dried up, and this is not only bad for crypto, but also other asset classes like stocks.

The big picture It’s been a very difficult time for crypto investors. The value of Bitcoin (the largest cryptocurrency) has dropped by more than 75%, to $15,984 in the past year.

The Federal Reserve’s Easy Money Policy provided huge money injections to cryptocurrencies during the pandemic. The central bank maintained interest rates at zero and infused the balance sheets of large banks with cash through massive purchases of bonds and other assets.

This is no longer true. Recent months have seen inflation rises, interest rates have been raised, and cash has dried up. This is bad news for digital assets which Wall Street analysts consider to be sponges for excess money.

Analysts at JPMorgan believe that the Fed’s policies could cause a significant drag on cash available for investment through next year. Nikolaos Panigirtzoglou, the JPMorgan strategist, wrote in a note that “All things considered, the slowdown of global money growth appears set to continue over this coming year with some contraction likely in the US.”

Investors are avoiding crypto because they fear the risk of losing more money. Other digital asset platforms such as Solana, are also in a cash crunch.

The spread Other risk-sensitive sectors such as Big Tech face similar problems.

The decline in the information technology sector (which includes companies such as Apple, Alphabet, and Microsoft) accounted for 44% of the overall S&P 500’s fall this year through October.

According to David Holt, an analyst at investment research firm CFRA, the reaction is completely natural. He said that the Federal Reserve basically “dropped money into our economy from a helicopter for a ten-year and then quickly removed the punchbowl.” “That has caused high-risk, high-growth areas like crypto to collapse. This mentality shift has also led to an overhang in other areas of the economy, such as technology.

Another victim. The shift in Fed policy has also hurt the US housing market.

During the pandemic, the Federal Reserve was the largest buyer of home loan debt. These mortgage-backed securities started to decline and mortgage rates rose dramatically. They are now above 7%, an increase of four percentage points over a year ago. Buyers’ purchasing power has also fallen. According to the National Association of Realtors, sales have fallen for eight consecutive months.

China’s Covid rebound

The Chinese move to relax Covid restrictions was applauded by the markets. The yuan reached its highest level in over a month and Hong Kong’s travel stocks jumped on the news.

Chinese authorities want to end the crisis in China’s huge real estate sector, which has been a major drag on the economy for the past year. Beijing unveiled Friday a 16-point plan to reverse a crackdown that has been placed on lending to the sector. This could be a turning point. The shares of China’s largest developer shot up by as high as 52% in Hong Kong Monday.

Investors may still want to exercise caution.

My colleague Laura He reported that China is facing severe economic difficulties. The economy has been unable to grow, youth unemployment has reached a record high, and the housing market was in decline.

The International Monetary Fund recently reduced its forecast for China’s growth to 3.2%. This is a significant slowdown from 8.1% in 2020. would be the country’s 2nd lowest growth rate in 46 years, better than in 2020 when the coronavirus epidemic decimated the economy.

Barclay’s also reduced its outlook for China’s economic growth for next year, partly due to expectations of a decline in global demand for Chinese products and a deepening property market slump. Since 2020, a government campaign to curb reckless borrowing and speculative trading have crippled the sector which is responsible for up to 30% of China’s GDP. As the sales of new homes, property prices have fallen.

Singles Day disappoints: Lackluster Sales at the World’s Largest Annual Shopping Event won’t help.

China’s Singles Day was the largest annual shopping event led by internet giants Alibaba ( BA) & JD) which concluded on Friday.

Alibaba didn’t disclose the final sales figures for the festival this year. It said instead that they were the same as last year.

The results of last year weren’t great either. According to Bain & Company, Singles Day sales rose 13% in 2021, which was “the smallest advance” ever.

Americans feel bad about the economy

According to a University of Michigan survey, consumers felt worse about the US economy last November.

My colleague Alicia Wallace reports that the negative outlook is due to severe rate hikes as well as decades-high inflation.

According to the monthly Surveys of Consumers, sentiment dropped to 54.7 from 59.9 in Oct. According to Refinitiv estimates, economists expected sentiment levels to fall to 59.5.

This is the lowest reading since June when gas prices reached a new record high.

Why it is important: The Fed closely monitors consumer expectations to determine whether inflation is becoming entrenched in America. If they believe that prices will stay high, this could lead to increased wage demands, which could in turn cause businesses to increase prices.

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