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Crypto volatility may soon recede despite high correlation with TradFi

Even though the crypto market is currently facing a lot of volatility, investments across the blockchain landscape have continued to surge.

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Even though the crypto market is currently facing a lot of volatility, investments across the blockchain landscape have continued to surge.

After forging a minor recovery of sorts earlier this month, the crypto market has returned to exhibiting high levels of volatility over the past two weeks. This trend has pervaded the market since late last year, with the total market capitalization of the digital asset industry having dipped from an all-time high of $3 trillion back in November 2021 to its current levels of $1.08 trillion, representing a drop of over 65%.

This then begs the question: “How long is this volatility going to last?” especially since the macroeconomic conditions surrounding the global finance sector have continued to deteriorate steadily since 2020, i.e. following the start of the COVID-19 pandemic.

In this regard, Abdul Gadit, chief financial officer for automated digital asset trading platform Zignaly, told Cointelegraph that whether one likes it or not, the crypto market is now deeply connected with the traditional finance (TradFi) economy, with the two now beginning to follow a similar trajectory.

In his view, the reason for the ongoing choppy price action and lack of liquidity is extreme retail and institutional caution emanating from rising inflation and recessionary pressure. He went on to add that whenever things start to go south with the economy, investments — especially within the realm of crypto finance — tend to start slowing down. Gadit added:

“Right now, global markets are in the middle of this bearish cycle with the crypto industry getting tighter in terms of its trading ranges. This price action can continue for weeks, if not months unless there is a macro environmental change. Chances of that are fairly low.”

What lies ahead for the crypto market?

Andrew Weiner, vice president of VIP services for cryptocurrency exchange MEXC Global, told Cointelegraph that even though the cryptocurrency market is closely correlated with United States equities, an industry that has remained quite stable over the last few months, there is still a lot of volatility due to growing action within the crypto derivatives segment. However, he said that the crucial narrative dictating the price action of the digital asset sector — at least for now — is the Ethereum 2.0 Merge, adding:

“After the recent discussions surrounding the Merge, the market seems to have totally priced in its effects. If we look at things from a fundamental analysis view, the market has stopped bleeding and is getting ready to start recovering.”

To support this claim, Weiner alluded to his company’s research data, which suggests that from Aug. 8–14 alone, a total of 19 projects within the Web3 space raised a total of $501.3 million.

He pointed out that of this figure, the Metaverse, nonfungible tokens (NFTs) and GameFi projects raised $82, while decentralized finance (DeFi), Web3 and infrastructure projects raised a combined $379.3 million. Lastly, various blockchain firms were able to accrue approximately $40 million from various venture capital firms. “Fundraising events are actively going on, which is a good sign of the market,” he added.

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Charmyn Ho, head of crypto insights for digital asset trading platform Bybit, explained to Cointelegraph that global markets are experiencing volatility, as investors seem to be on the fence following the Fed’s Jackson Hole speech. She noted that with equities riding many highs and lows over the past two weeks, the global economy’s near-term outlook remains quite obscure, especially as consumers, investors and policymakers can’t seem to agree on whether the U.S. is in a recession or if the Fed has inflation under control. Talking about the crypto market in particular, she added:

“The main event riding price action is Ethereum’s Merge. Some actors, mostly miners who won’t be able to continue their operations on the post-Merge chain, are planning to keep the proof-of-work Ethereum blockchain going through the hard fork. All this has the ability to impact short-term prices. With Ether being the second largest cryptocurrency in the space, its price movements certainly possess the capacity to move the crypto market.”

Is the ongoing volatility going to subside anytime soon?

Himran Zerhouni, head of business development for decentralized creator-oriented Web3 platform Favor Labs, told Cointelegraph that the ongoing turbulence is largely driven by macroeconomic factors, primarily high inflation in the U.S. and Europe and the risk of a looming global recession. 

Additionally, he believes that the digital asset market is also gripped by certain fears that have been provoked by the tightening of crypto regulation and the clear desire of world regulators to fully control the cash flows in cryptocurrencies. However, Zehrouni sees this trend potentially changing in the near-to-mid near term, adding:

“Over the coming year or so, the regulatory turbulence around stablecoins will subside. I suppose clear legislation for stablecoin issuers in the United States will emerge. The growing interest of users in the advantages of web3 and decentralization will push entire industries to adopt digital assets. Lastly, the Bitcoin halving in 2024 will inevitably lead to a new bull cycle in the crypto market. I believe it will start somewhere in the second half of 2023.”

Andrei Grachev, managing partner at DWF Labs — an early-stage blockchain investment firm — highlighted to Cointelegraph that crypto volatility has continued to subside, albeit slowly, in recent weeks, claiming that we are already at the downside of the current bear market cycle. That said, in his view, Bitcoin (BTC) could still go lower than its current levels, but its near-to-mid-term upside opportunity continues to remain extremely high.

As per DWF Lab’s in-house research data, after hitting an all-time high of near $70,000 last November, BTC can potentially scale up to around the $80,000–$90,000 mark when the next bull cycle commences. However, he did concede that since crypto, by its very nature, is volatile, there is little to suggest that volatility levels will decrease in the immediate future. “This is mostly due to the size of the market, which is relatively small compared to other traditional industries,” he said.

Technical data is giving mixed signals about Bitcoin’s future

According to CK Zheng, partner and chief investment officer for crypto hedge fund ZX Squared Capital, when examining Bitcoin’s 30-day realized volatility over the last twelve months, one can see that it has continued to range between 40% to 100%, staying at an average of around 70%. Realized volatility refers to the variation in returns associated, calculated by analyzing its historical returns within a defined time period.

As seen from the chart below, volatility spiked right after Singapore-based crypto hedge fund Three Arrows Capital — which had about $10 billion in assets under management — filed for bankruptcy in late July. Zheng to Cointelegraph:

“The current volatility is about 10% below the average. However, we believe the volatility will increase during the Sept-Oct time period to be above the average. This is mainly due to the market’s reaction to the Fed and a potential re-test of the June low.”

Similarly, Weiner believes that with BTC having dropped below the $22,000 level but continuing to find strong support in that range, he sees the flagship crypto — as well as the market at large — forging a trend reversal and scaling up to around $25,000–$26,000 by mid-September. 

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Lastly, Ho believes that the stabilization of digital asset prices in the near term is not immune to macro market uncertainty, but what is apparent is that, as the crypto market matures, investors and market makers can count on deeper liquidity, better trading and security infrastructure across the board and more stable crypto space. She stated that much of the turbulence experienced by the crypto market is due to the small market capitalization of the asset class, stating:

“Bitcoin is the largest crypto asset and has a market cap of over $400 billion. This is very small compared to most mature markets. Take gold, for example, which has a market cap of $11.6 trillion. When the crypto market grows to that level, perhaps volatility will reduce drastically. For now, it is important to note that just like other markets, there will always be an array of factors that can contribute to market volatility.”

Therefore, as we head into a future plagued by a growing amount of financial uncertainty, it will be interesting to see how the digital asset industry continues to react to the prevailing pressure and whether or not it can forge an uptrend anytime soon.

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What Is Helicopter Money? Definition, Examples & Applications

What Is Helicopter Money?What’s a surefire way to encourage spending, and thus, spur growth? How about dropping money from the sky? As far-stretched…

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Former Fed Chair Ben Bernanke describes helicopter money as a “money-financed tax cut.”

Public DomainPictures from Pexels; Canva

What Is Helicopter Money?

What’s a surefire way to encourage spending, and thus, spur growth? How about dropping money from the sky?

As far-stretched as this idea seems, it actually has credence in schools of economic thought, particularly during times of recession or supply shocks. Helicopter money policies inject large sums into the monetary supply either through increased spending, direct cash stimulus, or a tax cut.

This policy has two goals in mind:

1. Expand the supply of money, which improves liquidity

2. Spur economic growth

Economists consider helicopter money to be an option oflast resort, after other measures, such as lowering interest rates or quantitative easing, have either failed to lift an economy out of recession or because interest rates are already as low as they can get. This conundrum is known as a liquidity trap, when the economy is at a standstill because people are hoarding their savings instead of spending.

Since the practice of helicopter money also tends to foster inflation, it typically works best during periods of deflation, when prices, along with overall monetary supply, contract without a corresponding decrease in economic output. One relevant example is the Great Depression. Bank runs resulted in a reduction in both the monetary supply as well as in the overall prices of goods and services.

It takes a whole lot to lift an economy from such dire straits, and in such cases, helicopter money can be a viable option.

Example of Helicopter Money: The COVID-19 Recession

At the onset of the COVID-19 pandemic, the stock market crashed, and GDP nosedived, thrusting the economy into recession. While the Federal Reserve slashed interest rates and instituted a new round of quantitative easing measures, the U.S. government responded with helicopter money.

  • Under the Coronavirus Aid, Relief, and Economic Security Act (CARES), the Trump administration authorized two rounds of direct-to-taxpayer stimulus payments, of $1200 and $600 per person, in 2020.
  • In addition, as part of the Paycheck Protection Program (PPP), payroll loans were offered to thousands of small businesses—and many were quickly forgiven. The Federal Reserve also provided increased liquidity to banks so that they could offer loans to businesses to help them stay afloat.

Who Coined the Term Helicopter Money?

In a 1969 paper entitled “The Optimum Quantity of Money,” economist Milton Friedman coined the term “helicopter drop” as a method to increase monetary policy during times of economic stress. He wrote:

“Let us suppose now that one day a helicopter flies over [the] community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

The point was that the easiest way to lift an economy out of troubled times would be to give its population a direct injection of money. This would both expand the monetary supply and as well as increase the disposable income of the populace, resulting in greater consumer spending and increased economic output.

Who Made the Concept of Helicopter Money Popular?

In the 1990s, Japan was facing a deflationary crisis. Its central bank had implemented crippling rate hikes to calm its housing bubble—to disastrous economic effects.

In a 2002 speech to the National Economists Club, then-Fed Governor Ben Bernanke proposed that Japan’s central bank could have re-started the country’s economy through fiscal programs:

“A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money”

However, critics interpreted Bernanke’s words as his way of authorizing indiscriminate money printing, and the moniker “Helicopter Ben” took hold.

Bernanke would go on to chair the Federal Reserve from 2006–2014, and many of his theories were put into practice during the Financial Crisis of 2007–2008 and subsequent Great Recession. In fact, President Barack Obama credited Bernanke’s leadership during the crisis with averting a second Great Depression.

Helicopter Money vs. Quantitative Easing

While helicopter money and quantitative easing are both monetary policy tools, and both increase the monetary supply, they actually have different effects on a central bank’s balance sheet.

Through quantitative easing, a central bank buys trillions of dollars’ worth of long-term securities, such as Treasury securities, corporate bonds, mortgage-backed securities, or even stocks. This increases its reserves and expands its balance sheet. These purchases are also reversible, meaning the central bank can swap out its assets if it chooses.

Helicopter money, on the other hand, involves fiscal stimulus: distributing money to the public. It has no impact on a central bank’s balance sheet. The practice of helicopter money is irreversible, which means it is permanent—and cannot be undone.

In effect, helicopter money is less a long-term economic solution than it is a “one-time” or short-term operation.

Pros of Helicopter Money

In a 2016 blog post written for the think-tank Brookings Institution, Bernanke admitted that his helicopter money reference gave him some bad PR. In fact, he said that their media relations officer, Dave Skidmore, had warned Bernanke against using the term, saying “It’s just not the sort of thing a central banker says.”

But Bernanke insisted, and the moniker stuck.

To this day, Bernanke continues to believe in the practice of helicopter money as a tool the Fed could use in response to a slowdown in the economy. His successor at the Federal Reserve, Janet Yellen, agreed, stating that helicopter money “is something that one might legitimately consider.”

Other central bankers support the concept, particularly in Europe, which suffered from debt crises that mired its economy throughout the 2000s, igniting deflationary pressures like low demand and weak lending, and made recovery exceedingly difficult.

Cons of Helicopter Money

The biggest drawback of helicopter money is the inflation it tends to ignite. And since inflation is notoriously difficult to manage, once the inflationary fires have been stoked, what’s to prevent them from growing out of control—and fostering hyperinflation? That’s what happened in countries like Argentina and Venezuela, when their central banks printed money and gave it to their governments, who in turn gave it to the people. Inflation surged.

Helicopter money also leads to weakened currencies, because as more and more money is printed, its value decreases significantly. It could also deter currency traders from making long-term investments if the practice is prolonged.

Clearly, helicopter money is not a practice a central bank should undertake lightly.

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Jobs are up! Wages are up! So why am I as an economist so gloomy?

Usually when jobs and wages are rising, it’s a good thing, but right now they may signal higher odds of a nasty recession – and Americans aren’t…

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Why so sad, George? Chuck Savage via Getty Images

In any other time, the jobs news that came down on Dec. 2, 2022, would be reason for cheer.

The U.S. added 263,000 nonfarm jobs in November, leaving the unemployment rate at a low 3.7%. Moreover, wages are up – with average hourly pay jumping 5.1% compared with a year earlier.

So why am I not celebrating? Oh, yes: inflation.

The rosy employment figures come despite repeated efforts by the Federal Reserve to tame the job market and the wider economy in general in its fight against the worst inflation in decades. The Fed has now increased the base interest rate six times in 2022, going from a historic low of about zero to a range of 3.75% to 4% today. Another hike is expected on Dec. 13. Yet inflation remains stubbornly high, and currently sits at an annual rate of 7.7%.

The economic rationale behind hiking rates is that it increases the cost of doing business for companies. This in turn acts as brake on the economy, which should cool inflation.

But that doesn’t appear to be happening. A closer dive into November’s jobs report reveals why.

It shows that the labor force participation rate – how many working-age Americans have a job or are seeking one – is stuck at just over 62.1%. As the report notes, that figure is “little changed” in November and has shown “little net change since early this year.” In fact, it is down 1.3 percentage points from pre-COVID-19 pandemic levels.

This suggests that the heating up of the labor market is being driven by supply-side issues. That is, there aren’t enough people to fill the jobs being advertised.

Companies still want to hire – as the above-expected job gains indicate. But with fewer people actively looking for work in the U.S., companies are having to go the extra yard to be attractive to job seekers. And that means offering higher wages. And higher wages – they were up 5.1% in November from a year earlier – contribute to spiraling inflation.

This puts the Fed in a very difficult position. Simply put, there is not an awful lot it can do about supply-side issues in the labor market. The main monetary tool it has to affect jobs is rate hikes, which make it more costly to do business, which should have an impact on hiring. But that only affects the demand side – that is, employers and recruitment policies.

So where does this leave the possibility of further rate hikes? Viewing this as an economist, it suggests that the Fed might be eyeing a base rate jump of more than 75 basis points on Dec. 13, rather than a softening of its policies as Chair Jerome Powell had suggested as recently as Nov. 30. Yes, this still would not ease the labor supply problem that is encouraging wage growth, but it might serve to cool the wider economy nonetheless.

The problem is, this would increase the chances of also pushing the U.S. economy into a recession – and it could be a pretty nasty recession.

Wage growth still trails behind inflation, and for one reason or another people have been opting out of the labor market. The logical assumption to make is that to make up for both these factors, American families have been dipping into their savings.

Statistics back this up. The personal saving rate – that is, the chunk of income left after paying taxes and spending money – has fallen steeply, down to 2.3% in December from 9.3% before the pandemic. In fact, it is at its lowest rate since 2005.

So, yes, employment is robust. But the money being earned is eroded by soaring inflation. Meanwhile, the safety net of savings that families might need is getting smaller.

In short, people are not prepared for the recession that might be lurking around the corner.

And this is why I am gloomy.

Edouard Wemy does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Arsenal’s $55.9M Loss An Improvement Over Previous Fiscal Year

Arsenal took a heavy loss but saw reasons for optimism.
The post Arsenal’s $55.9M Loss An Improvement Over Previous Fiscal Year appeared first on Front…

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As a team in transition, Arsenal saw some losses in its last`fiscal year — but also saw signs of hope.

The Premier League team took an operating loss of $55.9 million in the fiscal year ending May 2022.

  • That figure was a significant improvement on last year’s $131.9 million loss.
  • The team saved around $39 million in wages compared to the previous year.
  • But broadcasting revenue dropped from $225 million to $178 million.

Arsenal benefitted from the lifting of pandemic restrictions, with matchday revenue rising by around $51.6 million to $453.7 million.

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The club failed to qualify for any European competitions in the 2020-21 season for the first time since 1994-95, which led to heavy spending on player contracts. 

“This investment recognises that the Club has not been where it wanted to be in terms of on-field competitiveness and that, as a minimum, qualification for UEFA competition needed to be regained, as a prerequisite to re-establishing a self-sufficient financial base,” the club wrote.

Arsenal credited owners Kroenke Sports & Entertainment for its willingness to invest in the team.

The move has borne fruit this season with Arsenal’s return to the Europa League, the second-tier competition to the UEFA Champions League. The team has already earned $8.4 million for its appearance there, with total potential earnings up to $22.1 million.

The post Arsenal’s $55.9M Loss An Improvement Over Previous Fiscal Year appeared first on Front Office Sports.

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