By Arjun Thakkar and Alan Green
Bitcoin worth more than $200bn was wiped off the crypto market on 12th of May. The crash in the BTC price accompanied a generally volatile and uncertain stock market that has seen the Dow Jones and FTSE100 down by 12.7% and 3.7% respectively from the start of the year. The core principle of the markets has always been higher the risk, higher the reward, but the current downward spiral seems to be driven by a perfect storm of events. Is this therefore the end of a bullish run for assets and the risk is too high now for any reward, or are we just seeing a major correction?
The key uncertainty spooking the markets are the high inflation rates. These are being driven by a number of factors, including supply chain problems from China, the Russia-Ukraine war and consequential 25% hike in the price of wheat. Interest rate hikes from the Fed and BoE are pushing borrowing costs higher and driving a sell-off in markets and crypto.
In these uncertain markets investors look for safe investments and the increase in interest rates in 2022 by 0.5% and 0.75% by the BoE and Fed respectively have made cash savings more attractive, leading to a massive sell off in stocks. Added to this, the hitherto stellar performances from crypto assets such as BTC and ETH have prompted well-heeled crypto investors to take their money off the table, further driving the down turn in crypto market valuations.
Supply chain issues continue to act as a drag. China accounts for around 13% of the global trade, and China’s zero tolerance approach towards Covid has led to a lockdown in the country, which has partly resulted in huge levels of shipping congestion near the Chinese ports. Companies such as Tesla have lost about a month of work because of the Shanghai lockdown, and some other companies claim that an “abnormally high” level of inventory was in transit, unavailable or held at ports, sending the stock market into a frenzy. (Bloomberg, 2022)
Image: World Bank
Along with the supply chain crisis, the Russia-Ukraine war has played a significant part in the fortunes of both stock and crypto markets. Russia previously supplied the European continent with 40% of its natural gas and 25% of its oil. The subsequent sanctions and ban on Russian imports sent the price of oil soaring to $109/barrel, driving inflation, and while some of the oil majors and smaller listed oilco’s are now trading at multi year highs, the uncertainty has weighed heavily on the markets.
The impact of higher oil prices has also impacted positively on companies at the junior end of the market. Echo Energy (AIM: ECHO) which has a license portfolio of 12 producing oil and gas fields with infrastructure in Santa Cruz Sur region of Argentina, found itself in the midst of this global demand for oil. Since the start of the Russia-Ukraine war (24th February 2022), Echo Energy shares have risen by 13.1% and at one point (22nd April) had returned its investors a 47% share price increase since the start of the war.
Source: Echo Energy
Whatever phrase you might use to describe it – end of bull run or correction – bitcoin has fallen to its lowest levels in years – $29,000. A number of factors can be attributed, but one key driver has been the collapse of so called stable coin terraUSD (UST), which as a supposedly stable asset, fell from a high of $118 (£96) to $0.4, rocking the crypto currency markets and having a knock-on effect on other stablecoins. The companies behind stablecoins try to ensure they remain in parity with assets such as the US dollar, so one token will equal $1. The collapse of a stablecoin has fundamentally weakened crypto assets for the present, but despite this, after touching $29,000, BTC rocketed 7.6% to $31,200 in one day, demonstrating that there is a chance for brave traders to turn a profit during these volatile times.
This volatility also boosted cryptocurrency transaction volumes on platforms like Binance and Hotcoin Global, which on 11th May 2022 saw 24hr trading volumes of $27.44bn and $10.27bn respectively, generating spectacular platform commission in the process.
There has also been a consequential read over for listed blockchain and crypto companies such as dual listed Coinsilium (AQX: COIN, OTCQB: CINGF), which is a blockchain, open finance, and crypto finance venture builder. Coinsilium shares fell to $0.025 on May 12th, but the next day shares rocketed to $0.039, providing a 24hr return of 56%. The drop in price for # Coinsilium can be attributed to systematic (market) risk and macro-economic factors such as inflation and the collapse in stable coin terraUSD.
While cryptocurrency continues to fluctuate, of course share price performance can be driven by stock specific issues in addition to macro factors. In the case of Coinsilium, in addition to a substantial amount of cash reserves held in crypto currency, the company is growing through its strong fundamentals and most recently a positive response to its recent seed investment in Yellow Network, the first broker clearing network for cryptocurrency exchanges, brokers and trading institutions. Yellow Network assists and develops mesh networks of crypto brokers and traders to execute ultra-high speed trading via decentralised exchanges. With such high volatility and huge transaction volumes in the crypto markets, Coinsilium’s Yellow Network investment could see it benefit from substantial, volume based commission revenues in the future.
What both Echo Energy and Coinsilium fundamentals demonstrate here, is that despite the market turmoil and highly uncertain outlook, they both depict the core principle of the markets – ‘higher the risk, higher the reward.