It’s becoming increasingly clear to investors that global equity markets will feel the chill winds from the Crypto Winter.
P 500 and MSCI emerging markets indices have increased by about 12 to 16 percentage points since the onset of the COVID-19 pandemic, while those from its returns have increased by about 8 to 10 percentage points.”The note adds that “in absolute terms, spillovers from bitcoin to global equity markets are significant, explaining about 14 to 18 per cent of the variation in equity price volatility and 8 to 10 per cent of the variation in equity returns”.
Already, global financial conditions have tightened dramatically, as the US Federal Reserve grapples with the highest inflation in four decades, which has pushed the US share market deep into bear market territory.But investors now worry that global share markets could feel even more pain if investors dump shares to make up for their deepening crypto losses.
More worrying still are the enormous contagion risks that are now becoming apparent within the crypto industry, as the turmoil in the sector has prompted some crypto lenders to suspend or limit redemptions. Crypto lenders have flourished in the past few years by offering eye-watering yields that dwarfed the interest rates available from regulated banks. Celsius, for instance, paid customers annual percentage yields of up to 18.6 per cent on crypto deposits.
But this 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 the collateral for loans it had taken out, which created extra liquidity stains. Davies added that Three Arrows was still trying to quantify its losses and value its illiquid assets, which include venture capital investments in dozens of private crypto-related companies and startups.
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