UBS, a global investment bank, raised its risk assessment of the United States going into recession within a year to 60% on Aug. 30 from 40% in June. Pierre Lafourcade, economist, stated that the latest data shows a 94% chance for the economy to contract, but it “doesn’t morph into full-blown recession.”
The difference can partly be explained by the “extremely low” levels of non-performing loans or defaults that exceed 90 days from credit borrowers. Jane Fraser, Chief Executive of Citigroup, stated that the bank feels very confident about its liquidity and credit quality. Reuters also reports that 0.1% of loans were written off by the financial sector in the second quarter.
Even in the unlikely scenario of avoiding a generalized depression, companies will see a decline in earnings due to rising inflation and Central Banks increasing interest rates while reducing their balance sheets. The pressure on corporate profits and stock prices is immense.
The valuation dynamics of cryptocurrencies are vastly different from those for stocks, corporate debt and equities. There are no standard metrics or indicators that can guide token prices. Different perspectives are held by market participants about the protocols and their uses.
The stock market, on the other hand, has a long history of reliable valuation indicators, which have been repeatedly used over the decades by investors, analysts, and pundits. The Price / Earnings multiple measure how long it would take for a company’s profit to cover its current market capitalization.
No matter how you measure success in the stock market, margins, revenues and interest rates are all important. Because it needs constant revenues, a stock can fall 70% or more before the market crashes. Crypto is unlikely to be subject to the same logic.
Understanding the stock market and commodities valuation
First rule in equity valuation is that investors have different expectations and timeframes. There are many indicators, consolidated models and analyst recommendations that can be used to help determine the equity price, but there is no guarantee it will.
We can track the Enterprise Value / EBITDA or Price / Earnings multiple. Investors closely watch these metrics. One will never know the future for these companies, even if they have long-term contracts like the energy sector.
Volatility and valuation should not be confused by traders. While a company may have predictable and steady cash flow, it could become a liability in bull markets where other sectors are expanding and growing their earnings. A stock market’s price can never be immune to the wider economy, as a collapse of a financial institution could also cause financial institutions to fall.
Let’s look at the New York realty market as a simple, utopic example. Development will not continue if it stops. This would mean that there won’t be any improvement in the land’s utility, including commercial or agricultural space. There is still room for price appreciation if an aggravated crisis leads to the breakup. Some investors will seek refuge in hard assets if this happens.
This is true for oil, cattle, and gold. To maintain the assets’ value, there is no constant flow of income. Worst-case scenario: No more oil and gold are extracted from the ground. However, their prices will likely rise as the current supply decreases.
What exactly are cryptocurrencies?
It doesn’t matter if investors view Bitcoin (BTC), Ethereum (ETH), as commodities, currencies, or novel technology bets. The production schedules for both assets are very limited. They will still be produced even if validators (nodes), and hashrate drop by 90%. They will continue to be used as independent digital asset transmission networks.
Although a prolonged economic recession could have a significant impact on the price of cryptocurrency, there is no reason to believe that the network will be rendered inoperable by inflation, rising interest rates, or credit defaults. Walmart, UnitedHealth Group and Ford Motor Company are all among the top 20 largest companies in terms of revenue.
In paradoxical circumstances, failing companies do not make a good store of value in times of recession. Bankrupt assets can be liquidated, and shareholders get zero. Cryptocurrencies’ decentralization feature protects investors from all possible outcomes, including the possibility of being delisted from major exchanges.
However, alternative hard assets such as cryptocurrencies could be created by the initial shock to a global recession. This could include the housing market crash or growing distrust of the financial system.
It sounds far-fetched, but it would be the first serious global financial crisis that cryptocurrencies have faced since 2009.
It is not clear if crypto valuations can sustain themselves over the long-term. The sector has so far survived major market participant failures (exchanges and lending intermediaries) and no intervention was necessary. It could be said that the sector passed its first test. However, it is too early to release the final report.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.
Eileen Wilson –Technology and Energy
My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.