New York CNN Business — The stunning fall of FTX, one of the largest cryptocurrency exchanges, caused a shock in the crypto universe last week. Sam Bankman-Fried, a 30-year-old crypto titan and FTX executive, has watched billions of his fortune evaporate as a result of a bankruptcy filing that has shaken the trillion-dollar industry to its core. The pain probably isn't over for investors yet.
What's going on: JPMorgan analysts are now predicting another 25% drop in the bitcoin exchange rate in the coming weeks.
This is partly due to the ongoing effects of the FTX, as well as another problem that has already affected the cryptocurrency: in addition to raising interest rates, the Federal Reserve has been reducing its balance sheet since June, withdrawing money from financial markets to cool the economy in the fight against inflation. These efforts mean that capital is drying up – and this is bad not only for cryptocurrencies, but also for other asset classes, including stocks.
The overall picture: It was a very difficult time for crypto investors: the value of Bitcoin, the largest cryptocurrency, has fallen by more than 75% to $15,984 since this time a year ago.
Cryptocurrencies enjoyed huge cash injections in the era of the pandemic thanks to the easy money policy of the Federal Reserve System. The central bank kept interest rates near zero and replenished the balance sheets of large banks with cash, buying huge amounts of bonds and other assets.
This is no longer the case. In recent months, inflation has risen sharply, interest rates have been raised, and this cash has dried up. This is bad news for digital assets, which, according to Wall Street analysts, are sponges for this excess money.
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JPMorgan analysts say the Fed's policy will significantly limit the availability of cash for investment next year. “In general, the slowdown in the growth of the global money supply seems to continue in the coming year, while some reduction is likely in the US,” JPMorgan strategist Nikolaos Panigirtsoglu wrote in a note.
Less money means more risk aversion, and investors are abandoning cryptocurrencies. Now other digital asset platforms like Solana are also facing cash shortages.
Spread: Other risk-sensitive sectors, such as Big Tech, face similar challenges.
The decline in the information technology sector, which includes companies such as Apple, Alphabet and Microsoft, accounted for 44% of the decline in the entire S&P 500 index this year through October.
The reaction makes complete sense, said David Holt, an analyst at investment research firm CFRA. The Federal Reserve, in fact, “dropped money into the economy from a helicopter for a decade, and then quickly took away the punch bowl,” he said. “This has led to the collapse of high-risk and fast-growing sectors such as cryptography. This shift in mentality has also created a preponderance in other sectors of the economy, such as technology.”
Another victim: The US housing market has also been affected by the Fed's policy change.
The Federal Reserve was one of the largest buyers of mortgage debt during the pandemic. As a result, these mortgage-backed securities began to sell off, and mortgage rates increased significantly. Now they are more than 7%, which is four percentage points more than a year ago, and the purchasing power of buyers has fallen sharply. According to the National Association of Realtors, sales have been falling for eight months in a row.
Covid's Return to China
Markets welcomed China's decision to ease restrictions on the fight against Covid last week. The yuan rose to its highest level in more than a month, and shares of travel companies listed in Hong Kong jumped on the news.
And the Chinese authorities are trying to put an end to the crisis in the country's vast real estate sector, which has taken a heavy toll on the economy over the past year. In what could be a key turning point, Beijing on Friday unveiled a 16-point plan that cancels tough measures on lending to the sector. Shares of the largest Chinese developer soared by as much as 52% in Hong Kong on Monday.
But investors may still want to proceed with caution.
As my colleague Laura He reported, China is facing serious economic problems. Economic growth has stalled, youth unemployment has reached an all-time high, and the housing market has been collapsing.
The International Monetary Fund recently lowered its forecast for China's growth to 3.2% this year, representing a sharp slowdown from 8.1% in 2021. That would be the second lowest growth rate in the country in 46 years, the best only compared to 2020, when the initial coronavirus outbreak hit the economy.
Barclay's also lowered its forecast for China's economic growth next year, partly based on expectations of falling global demand for Chinese goods and a deepening downturn in the real estate market. The sector, which accounts for up to 30% of China's GDP, has been suffering from a government campaign to curb reckless borrowing and speculative trading since 2020. Real estate prices are falling, as are sales of new homes.
Singles Day is disappointing: low sales at the world's largest annual shopping event won't help.
Chinese Singles Day, the world's largest annual shopping event held by Internet titans Alibaba (BABA) and JD.com (JD), ends on Friday.
This year, for the first time since its launch in 2009, Alibaba did not disclose the final sales data of the shopping festival, saying instead that the results are in line with last year's.
Last year wasn't impressive either. According to Bain analysis & For example, in 2021, sales on Singles Day increased by 13%, which is “the smallest achievement in history.”
Americans have a bad attitude to the economy
According to a University of Michigan study published on Friday, consumers began to feel worse about the US economy in November.
The negative outlook appeared against the background of a sharp increase in rates and inflation reaching a ten-year high, my colleague Alicia Wallace reports.
Preliminary data from the monthly consumer survey index showed that sentiment fell to 54.7 from 59.9 in October. Economists had expected the sentiment level to drop to 59.5, according to Refinitiv estimates.
This is the lowest figure since the summer of this year, when sentiment bottomed out after gas prices hit a record high in June.