Market Insights Weekly Update: Change Of Direction

Crypto markets witnessed one of the biggest destructions of wealth ever seen. Here's why you should invest in stable and reliable returns.

15 November 2022

Insights, Investments

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Last week, crypto markets witnessed one of the biggest destructions of wealth ever seen. Our investment team shares the lessons you can learn and why you should invest for stable and reliable returns.

(7 November 2022 – 11 November 2022)

Major global stock indexes rebounded in a big way from the previous week’s declines, driven largely by a one-day rally on Thursday due to the much softer-than-expected consumer price index (CPI) report in the US. The S&P 500 added about 6.0% and the MSCI World rose 6.6%. MoneyOwl’s 100% equity portfolio ended the week positive as well with gains of 4.10%.

In fixed income, the new inflation numbers fueled speculation that the US Federal Reserve could begin to scale back the size of interest rate increases from December, sending bond prices higher and yields lower. The Bloomberg Barclays Global Aggregate bond index rose 5.0% while the benchmark US 10-year Treasury yield fell 45bps to 3.85%.

Crypto Drama

Things move fast in the crypto world and last week’s events showed that your net worth can evaporate in days, even for multi-billionaires. In one of the biggest destruction of wealth ever seen in history, Sam Bankman-Fried, founder of one of the largest crypto exchange platforms FTX, saw his $16 billion net worth wiped out in days.

This time around, the financial setback set off some turmoil in bitcoin and appears to have spilt over into the wider market, with losses sustained by retail – and some professional – investors hurting risk appetite and forcing drawdowns in stocks last week. Few could have anticipated the sudden collapse of Sam Bankman-Fried’s multibillion-dollar crypto empire. Yet for all the twists, revelations and anguished Twitter threads, it’s a fall from grace with an unmistakable ring of familiarity.

FTX ran into trouble after their native cryptocurrency token FTT, which investors can buy and use for operations like paying transaction fees, saw a large decline in its value after Changpeng Zhao, founder of the crypto exchange Binance, tweeted that Binance will sell its FTT tokens due to ‘recent revelations’. In response, FTT’s price plummeted and investors of FTT tokens rushed to pull out, in fear that it would be yet another fallen crypto company.

FTX scrambled to process requests for withdrawals, which amounted to an estimated $6 billion over three days. The company entered a liquidity crunch, where it lacked the money to fulfil requests and FTX filed for bankruptcy on Friday. Sam Bankman-Fried resigned as CEO of FTX and FTX was taken over by John J.Ray III, a corporate turnaround specialist who previously served as a chief restructuring officer and plan administrator in high-profile bankruptcy cases such as Enron.

Lessons Learnt

The lessons to be gleaned here are important. Just last year in June 2021, FTX was a huge draw for venture capitalists eager to get in on the bitcoin boom. In June 2021, FTX raised $1 billion at an $18 billion valuation from venture investors such as Paradigm, SoftBank and Sequoia Capital. Three months later, FTX valuation reached $25 billion, from investors like our very own Singapore investment firm Temasek, Tiger Global Management and the Ontario Teachers’ Pension Plan.

In January this year, crypto prices were on the decline, but FTX charged ahead, reaching a staggering $32 billion valuation. Just last week, that $32 billion figure has gone up in smoke. The events that unfolded showed that given life’s uncertainty, you should never put your eggs in one basket.

Investing in cryptocurrencies is only suitable for investors who understand and can tolerate the high risks involved with the investment. It’s similar to investing in penny stocks, but with even more volatility, which may give extremely high returns in a short time, or amount to zero. All investors need to consider this fact and invest only a small fraction of their spare capital into cryptocurrencies and take a long-term horizon. It is never wise to invest your family savings, children’s education funds or your long-term retirement monies on extremely volatile assets, especially if you can’t afford to lose any of it without affecting your lifestyle.

The key in investing is to look for stable and reliable returns, through diversification and staying invested to capture the long-term expected capital market returns which tend to follow predictable upward trends. The financial markets are an effective information-processing machine and historically, financial markets have always rewarded long-term investors with a long-term return that offsets inflation.

Inflation Relief

Although US inflation remains near its highest level since the early 1980s, the latest monthly CPI report brought some relief. Inflation rose at an annual 7.7% rate in October—down from 8.2% in September—and 0.4% on a month-to-month basis. Both figures were below the levels that most economists had expected.

Bali Meeting

President Joe Biden heads to Bali, Indonesia, for his first in-person meeting with China’s Xi Jinping since taking office last year with promises to try to keep the relationship from getting worse and to reduce the risk of war over Taiwan. But the mood in both Washington and Beijing is trending towards more confrontation. The question is whether these two leaders, whose economies are deeply intertwined, are headed toward a permanent separation or if they can find calm relations face-to-face.

US Mid-Term Elections

The struggle for control of the US Senate boiled down to three races in Georgia, Arizona and Nevada, with each party needing to win two of those states to secure a majority. Democrats need 50 seats to control the Senate with Vice President Kamala Harris’s tie-breaking vote, while GOP needs to capture 51. Republicans are currently locked into 49 Senate seats and Democrats at 48. Also, President Joe Biden said he still plans to seek re-election and that he would likely make an official call early next year. He hailed the “strong night” Democrats had in Tuesday’s midterm elections, but acknowledged voters’ frustration with the country’s direction.

Surprise Shift

China issued sweeping relaxation measures on property and Covid controls, in the strongest signal yet that President Xi Jinping is now turning his attention to rescuing the economy. Beijing unveiled an extensive 16-point rescue package for the struggling real estate market, just days after announcing 20 measures to guide officials as it eases its contentious Covid-Zero policy. The major policy shifts will likely aid China’s growth outlook and add fuel to a market rally that sent Chinese shares in Hong Kong up 17% in the past two weeks.