The stock market is nudging slightly higher Wednesday morning, but things aren’t quite as clear-cut for crypto funds. Bitcoin, the premier crypto-token, has struggled to break back above $20,000 as investors warily sell out of the risky asset. Despite some assertions from enthusiasts that Bitcoin could act as “digital gold” and hold its value in the face of inflation, this pattern hasn’t taken shape. Instead, inflation has crushed the value of digital currencies.
Crypto hedge fund Three Arrows Capital is now diving into liquidation as its long-shot crypto bets have failed to bear fruit. The fund has reportedly brought in Teneo Restructuring to help oversee the liquidation process to pay back lenders. The crypto industry has lost billions of dollars in value since the start of 2022 as investors scramble to ditch the underperforming asset class.
The stock market is slightly higher Wednesday, despite all the bad news for investors. This morning, the S&P 500 has erased some of its losses from Tuesday. The Dow Jones posted a gain of around 150 points Wednesday morning, outperforming the other two indexes. The Nasdaq is up slightly, but analysts say the tech-heavy index is still facing pressure from underperforming tech companies.
Crypto Sell-Off Deepens
The crypto industry is deep in the grips of another “crypto winter,” a pattern of uncertainty that sees most digital tokens plunging in value. So-called stablecoins, crypto-tokens pegged to other currencies like the US dollar, have tanked in value in recent weeks. Terra USD, a stablecoin meant to track the value of the dollar, collapsed in May, sending shockwaves of fear through the industry.
This has resulted in havoc for some crypto exchange platforms like Binance and Coinbase. Their stock prices have tanked since the crypto winter started, leading to many experts advising investors to fully divest from crypto. This could keep the value of Bitcoin low, between $17,000 and $21,000, for the foreseeable future. This has also pressured other coins like Ether and Cardano, which have trended lower for the past several months.
“A narrative that could well play out for the rest of the year and beyond is guiding bitcoin lower today, one of looming recession and mushrooming levels of inflation,” writes a team of Bitfinex analysts. Now, even some crypto stalwarts are losing their market positions in the face of tanking values. Without a major shift in the crypto market, it’s likely that stories like Three Arrows Capital will become the norm, not the exception.
Three Arrows Capital
Three Arrows hasn’t made a public statement regarding its liquidation, but Sky News broke the story on Wednesday. “The firm’s demise is likely to raise further questions, however, about the regulatory oversight to which cryptocurrencies and other digital assets are subject in the world’s major financial centers,” writes Sky News contributor Mark Kleinman.
Three Arrows reportedly defaulted on a loan worth hundreds of millions of dollars it owed to Voyager Digital. As a result, a court in the British Virgin Isles ordered Three Arrows to be liquidated on June 27. This will likely cover some of the firm’s outstanding debts, though it’s unclear whether it will have further ramifications in the wider crypto industry. Depending on the arrangement of Three Arrows’ debts, it’s possible this liquidation could start a domino effect in the crypto industry as borrowers default on loans.
Now, with some buyers acquiring Bitcoin while it’s hovering around recent lows, some experts warn that this could be a “bear trap”. “Most bounces are being sold off for the past few weeks, typically categorized as bear market bounces, aiming to trap late buyers, only to have them sell off positions lower,” says Vijay Ayyar, vice president of corporate development at crypto exchange Luno.
Analysts Warn of Recession Risks
This crypto anxiety underscores a wider market fear that a recession could be just around the corner. The soaring inflation rate has slowed consumer spending dramatically, leaving retailers with a large overstock of inventory and crushing the profit margin for some companies. This is coinciding with rising labor and shipping costs, further pressuring an overheated economy.
“Anyone thinking this recession will be mild doesn’t understand recessions,” writes Euro Pacific Capital CEO Peter Schiff, an economist who predicted the 2008 financial crisis. “The longer interest rates are held too low during a boom, the more mistake that must be corrected during a bust. Since rates have never been so low for so long, this recession will be the most severe yet.”
While the Federal Reserve is now scrambling to hike interest rates to keep up with red-hot inflation, some experts say it’s too little, too late. Conventional wisdom among economists holds that the Fed needs to hike interest rates before inflation starts, not after. By waiting too long to address the market’s dynamics, the Fed might have put the economy in a position for a painful recession later this year.