Fed Officially Says Recession?

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2022-09-22 15:54:42

Market situation

Last Friday, the US stock market gained slightly with a slight increase in all three indexes. Oil price remained high at 108 USD/barrel. Gold is flat at 1812 USD/ounce. Despite the slight increase in prices, stocks just ended their worst half-year since 1970.

Bitcoin price is flat at around $19,000. Major altcoins don’t move much. The market is down and the sentiment is scared but the capitalization rate of BTC is not increasing sharply compared to the past.

3AC officially filed for bankruptcy

The crypto market has more bad news. Three Arrow Capital (3AC) has officially filed for bankruptcy after experiencing financial problems due to the collapse of LUNA and UST. 3AC has invested a lot of capital in LUNA and UST, so when these two tokens collapsed, it led to the investment of many large individuals and organizations.

The fact that 3AC filed for bankruptcy did not surprise investors. However, the Singapore-based company filed for bankruptcy in the United States under Chapter 15 for foreign companies with links to host country investors. If the bankruptcy filing is approved, 3AC’s assets will be protected under bankruptcy regulations.

3AC also borrowed heavily from many companies, including Voyager, causing these companies to be affected as well. Yesterday, Voyager Digital company suspended all customer deposits and withdrawals. The company’s CEO said that the decision gives the company more time to continue to find a solution and that they will provide additional information at “the appropriate time”.

The problem with the big companies is that they lend to 3AC with very little or no mortgage. Therefore, when 3AC has financial problems and is now bankrupt, the ability to recover the loan amount is very low. According to Voyager’s share, they currently hold more than 658 million USD in total assets, more than 1.2 billion USD in loan assets, but the mortgage amount is just over 168 million USD.

Typically, individuals who borrow crypto mortgages are only allowed to borrow up to 50% of the value of the collateral crypto. When the market falls or the borrower is unable to repay the loan, the lender can liquidate the mortgage to recover. But with larger companies, lenders do not follow this principle.

Economic difficulties and crypto winter is not over yet, FTX CEO Sam Bankman-Fried said that many crypto exchanges will go bankrupt due to running out of funds. FTX is also a major lender to companies like Celsius, BlockFi, and many more.

In light of the sensitive situation of crypto, the company Tether also stated that they are in the process of reducing the loan amount. As of March 31, Tether had approximately $20.1 billion in short-term loanable commercial paper. They reduced that number to $8.4 billion last month. At the end of July, there is about 5 billion USD of Tether commercial paper that will expire and they will collect this money. As a result, the amount left in the commercial paper is only $3.5 billion and the amount of cash they hold will increase.

What will the market look like by the end of 2022?

Many people have said that the risk of the current economic recession is very high. As Ark Invest CEO Cathie Wood also thinks a financial recession is on the way. By definition, a financial recession occurs when two consecutive quarters of negative GDP growth. The Atlanta Fed has updated its Q2 GDP growth forecast to be negative 1%. If this prediction is correct, a recession is already underway. To really confirm a financial recession by definition we need to wait for the official report on GDP to be released. However, many banks in the US still give quite optimistic estimates for the stock market later this year.

As for the crypto market, many predict that BTC could bottom out at $15,000 to $20,000 and then bounce back. Others suggest that the price of BTC could drop to $14,000 or $12,200, the price at which Celsius was liquidated on its BTC mortgage. BTC and crypto continue to be influenced by macroeconomics, so if banks’ predictions for growth by the end of 2022 are correct, it also bodes well for crypto.

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