2017 has been marked by an extraordinary rally in cryptocurrencies and equity markets. What’s are some of the biggest hurdles these bullish investors must jump as we move closer to 2018?
Is the Crypto-rally over?
Historically, financial markets have created asset prices bubbles, such as the dot com bubble in the 1990’s and the recent crash in US housing prices in 2008. The recent rally in virtual currencies have defied opponents, while recruiting supporters this year.
Legal authorities around the world have been quietly monitoring cryptocurrencies and may step in to regulate the blockchains in the near future. The People’s Bank of China said on Monday that it completed investigations into Initial Coin Offerings, stating that it will strictly punish offerings in the future and discipline legal violations. The bank noted that those who have raised money must provide refunds.
Once reaching $5000, digital asset’s grandfather, bitcoin, is now at just $4192. Still, the decline does not come close to erasing the stunning gains we’ve seen this year. Bitcoin has climbed from $1000 at the turn of 2017 to $5000 in just over six months.
The Equity Bull Run
Thanks to central banks in the UK, US, Europe and Japan encompassing quantitative easing as their monetary policy stance, the cost of borrowing has been ultra-low. As a result, companies have relished in this cheap credit. However, instead of plunging the access cash into research and development, many companies have opted to help fund share buybacks (funds used to pay shareholders) or increase dividends.
Debt finance (borrowing money to be repaid with interest) became cheaper than equity finance (raising money by selling interests in the company) therefore, debt has risen since the central banks have slashed interest rates to these record-low levels.
The increase in debt on balance sheets could eventually cause a decline in equity prices. Perhaps, even, some companies may struggle with highly leveraged balance sheets once interest rates start to creep upwards.