Crypto Debacle – Week in Review

Crypto Debacle – Week in Review

Crytpo Debacle

Crypto Debacle. The news is full of the latest cryptocurrency debacle. The cryptocurrency exchange platform FTX collapsed, and many investors and traders were caught in the middle. The exchange filed for bankruptcy, and the CEO, Sam Bankman-Fried, resigned.

What Caused the Crypto Debacle?

On November 2^nd, CoinDesk reported that Alameda Research, a hedge fund started by Mr. Bankman-Fried, owned a large number of FTT tokens. The FTT tokens are native to the FTX exchange and are used to pay for fees. 

Subsequently, on November 6^th, Binance announced it would sell its FTT tokens. The price of FTT tokens plunged, and traders rushed to the exits. FTX had an estimated $6 billion in withdrawals in three days. Seemingly, FTX entered a liquidity crunch because it could not fulfill the withdrawals.

On November 8^th, Binance stated it reached an agreement to buy FTX and, in effect, bail it out. But on November 9^th, Binance said it would not buy FTX, citing regulatory investigations and reports of mishandled funds.

Second Effects of the Crypto Debacle

The FTT token price has been down 90%+ since November 8^th. Secondary effects include Bitcoin declining 19% and Ether falling 24% this month.

Investigations started by the U.S. Justice Department and the Securities and Exchange Commission (SEC) are focused on whether FTX used customer money to fund trades by Alameda Research.

John Jay III is now CEO of FTX. He has helped manage some of the largest corporate collapses, including Enron in 2001. In a court filing on November 17^th, he wrote, 

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” 

Lastly, cryptocurrency lenders BlockFi and Genesis are reportedly filing for bankruptcy. In addition, another cryptocurrency lender, SALT, paused withdrawals, according to The Wall Street Journal.

Risks for Cryptocurrency

Cryptocurrency is risky because it is relatively unregulated or, at best, lightly regulated. Moreover, exchanges located outside the United States are probably riskier since it may be harder to recoup invested money. 

Also, cryptocurrency does not offer protections, unlike some other investments. In the United States, the Federal Deposit Insurance Corp. (FDIC), National Credit Union Administration (NCUA), and Securities Investor Protection Corp. (SIPC) offer savers and investors some degree of protection for banks, credit unions, and brokers.

Next, the asset class is new; thus, investors have not experienced cryptocurrency volatility during economic slowdowns, recessions, or other conditions. 

Lastly, cryptocurrency is behaving differently than anticipated. For example, some proponents stated it was an inflation hedge, but cryptocurrency prices dropped dramatically during a period of high inflation and rising interest rates. The reasons are complex, but cryptocurrency seemingly does not function like a currency or gold because it cannot easily be exchanged for goods or services.

Stock Market Performance Overview

11/25/22

The stock market had a positive week. All eleven sectors were up. The Dow Jones Industrial Average (DJIA) outperformed other indices continuing the trends for the year. As shown by data from Stock Rover*, all the major indices were positive. Only oil prices were down.

The Utilities, Basic Materials, and Healthcare sectors had the best week. However, Energy, a leader for much of 2022, declined again because oil prices have plunged, dimming the prospects of oil and energy companies for Q4 2022 and 2023.

For the year, the Dow 30 is doing the best, and the S&P 500 Index is still in a correction, while the Nasdaq is still in a bear market. The Utilities and Consumer Defensive sectors are now positive for 2022.

The dividend growth investing strategy has performed relatively well, outperforming the S&P 500 Index and Nasdaq in all instances. The table below shows their performance by category. The Dividend Champions have a positive return, and the Dividend Kings and Dividend Aristocrats are close behind.

The Bottom Line on Crypto Debacle

Cryptocurrency is risky. It is arguably riskier than stocks and bonds. The bottom line is that investors without exposure have not suffered significant losses. However, the FTX failure will affect many, and the secondary effects will still be felt for some time.

Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of October 2022. As a result, the number of companies on the list has risen to 576. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Three new additions indicate companies are experiencing solid profits and cash flow in October.

The new additions were Presidio Property Trust (SQFT), The Marketing Alliance (MAAL), and Chimera Investment (CIM).

Market Valuation

The S&P 500 Index is trading at a price-to-earnings ratio of 20.94X, and the Schiller P/E Ratio is about 29.50X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent market correction and a bear market. However, we are nearing the long-term averages. Earnings multiples of more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

Shiller PE Ratio History

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was down about 2.5 points at 20.50. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 Index options. It is commonly referred to as the fear index.

Yield Curve

The yield curves shown here are the 10-year U.S. Treasury Bond minus the 3-month U.S. Treasury Bill from the New York Fed and the 10-year U.S. Treasury Bond minus the 2-year U.S. Treasury Bond from the St. Louis Fed.

Thanks for reading Crypto Debacle – Week in Review!

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Published at Sun, 27 Nov 2022 04:00:00 -0800