The stock market meltdown has cranked up a notch, while crypto keeps crashing. Here’s what you need to know.
The S&P 500, a key measure of the American stock market, has been flirting with the idea of going into a bear market for weeks now, but on Tuesday (New Zealand time) it finally happened. In addition to the regular markets, the crypto markets are in free fall too, with the sell-off continuing and prices of the big two (Bitcoin and Ethereum) reaching lows we haven’t seen for 18 months.
A what now?
What is a bear market anyway? Essentially it’s when stock prices decline at least 20% from a recent peak. These are relatively rare and quite often they kick off a recession, which is a big scary word for saying the total size of the economy is getting smaller, rather than bigger. The S&P peaked on January 3 (which is now the “starting point” of this bear market), and the continued drop comes as concerns mount over high inflation, the war in Ukraine, Covid, and the Federal Reserve System (the US central bank) attempting to rein in the US economy with rate hikes.
This may seem far away from New Zealand and our own stock market, but the rest of the global markets tend to follow the world’s biggest economy, which is reflected in the NZX 50 being down by almost 20% since the start of the year, nearing bear territory itself.
What about crypto?
On the crypto side of the (bit)coin, there are a few major catalysts for the recent crash, and they all feed off one another. The first is the continued fall of Bitcoin (BTC) and Ethereum (ETH), which has led to an increasing number of traders getting margin-called – ie being forced to sell off the assets they held as collateral for the loan and essentially being “liquidated”. The last of the big three reasons for the increasing market uncertainty is one of the leading crypto exchanges, Celsius, halting customer withdrawals.
Bitcoin reached a high of $US68,000 in late 2021 and has steadily fallen since then, with the weekend’s drop of 15% pushing the mainstay of the crypto markets down to $US22,000. Ethereum matched Bitcoin’s drop, reaching a low just over the crunch point of $1,000 – any lower and reports say it would have triggered $400 million worth of forced margin sell-off.
Why has this happened?
It’s difficult to pinpoint exactly why markets fall like this, but it’s safe to say the crash is compounded by market decline around the world in general. As stock prices go down and investors become fearful, risky assets like crypto are seen to be less desirable, and the price decreases. Investors see the price go down, they sell to de-risk their portfolio and the price drops even more. This vicious cycle is boosted with the forced sell-off of margin-called traders.
Finally, this sell-off has forced one of the leading crypto exchanges, Celsius, to halt withdrawals. Facing apparent liquidity issues, the network – which has more than 1.7 million customers and reportedly over $US20 billion under its management – simply doesn’t have enough cash on hand to pay the increasing number of customers wanting to convert their crypto assets into cash. The fear index in the crypto markets is super high, and moves like this don’t inspire confidence for existing investors – what if their exchange is next?
Wherever you look, markets are being pounded right now, and for many this is the first time experiencing a market downturn to this extent. If we zoom out, history shows that the US stock market has always recovered from declines in the past. If you put money in stocks, over 10 years you would have been down only 6% of the time. Crypto has had many bear markets in its brief lifetime as well, albeit with higher swings, but the industry is still young. In 10 years’ time we may just look back on this decline as we look back on 2008 – a financial crisis, but one we bounced back from.
