On Aug. 30, global investment bank UBS increased its view on the risk of the United States entering a recession within one year to 60%, up from 40% in June. According to economist Pierre Lafourcade, the latest data showed a 94% chance of the economy contracting, but added that it “does not morph into a full-blown recession.”
Partially explaining the difference is the “extremely low levels” of non-performing loans, or defaults exceeding 90 days from credit borrowers. According to Citigroup Chief Executive Jane Fraser, the institution “feels very good about” liquidity and credit quality. Furthermore, Reuters states that the financial industry wrote off merely 0.1% of its loans in the 2Q.
The problem is that even in the now-improbable scenario of avoiding a generalized recession, companies will face diminishing earnings as surging inflation limits consumption and Central Banks increase interest rates while winding down their balance sheets. Either way, the pressure on corporate profits is huge and this puts pressure on stock prices.
The valuation dynamics for cryptocurrencies vastly differ from equities, corporate debt, and stock markets. The truth is that there are no set metrics or indicators to guide token prices. Market participants have different perspectives on the protocols and their use cases.
On the other hand, the stock market has battle-tested valuation indicators that have been consistently used for decades, pounded by analysts, pundits and investors. For instance, the Price / Earnings multiple measures how many years would take a company to generate enough profit to cover its current market capitalization.
Regardless of how one measures the stock market success, it depends on margins, revenues, interest rates, and the U.S. dollar foreign exchange rate. That’s why a stock can go down 70% or more even before a recession hits the markets, as it desperately needs a constant inflow of revenues. It’s unlikely that the same rationale is applicable to crypto?
Understanding stock markets and commodities valuation
The first rule of equities valuation is: investors have different inputs, expectations, and timeframes for a stock. Sure, there are consolidated models, indicators and analysts’ recommendations, but ultimately, there’s no guarantee that the equity price will follow any rationale.
We can chart the Price / Earnings multiple, Enterprise Value / EBITDA, or whatever metric investors closely monitor. However, one will never know what the future holds…