Why Bitcoin and Ethereum are driving the stock market lower

The stock market reacted negatively last week to fears of higher interest rates and a slowing economy, and it doesn’t look like the new week will start differently. As of 8:45 a.m. ET, futures contracts are on Dow Jones Industrial Average (^ DJI 0.00%)And the Standard & Poor’s 500 (^ GSPC -0.72%)And the Nasdaq Composite (^ IXIC 0.00%) It’s down another 1%, which has led to significant declines of between 4% and 5% last week.

The Cryptocurrency markets Investors haven’t helped much lately, with prices Bitcoin (BTC -5.56%)And the Ethereum (ETH -7.88%), and other well-known digital assets that failed to provide any heft to diversified portfolios. In fact, the losses for Bitcoin and Ethereum on Monday morning were more comprehensive than those in the stock market. This has led some investors to question whether the long-term promise of cryptocurrencies as a game-changing financial innovation will be able to withstand an adverse cycle of tighter monetary policy and higher interest rates.

Another blow to confidence in cryptocurrency

Cryptocurrency markets are open all weekend, but most of the bearish movement in digital assets did not come until early Monday morning. After trading both sides of $20,000 on Saturday and Sunday, Bitcoin plunged as much as $1,600 early Monday, and shortly before the stock market opened, the digital asset was trading at $18,800.

Ethereum had a slightly bigger problem holding it over the weekend, as its price started dropping on Sunday. From its level around $1,450 on Friday afternoon, Ethereum lost nearly 10% of its value, trading at $1,320 just before the stock market opened. Although Ethereum has its own fundamental changes taking place as a result of the recent expiration merge eventSome of the same macroeconomic factors affect both cryptocurrency giants.

Other tokens have also lost their power. Both are useful as Cardano And the ribbed And more meme-ish digital assets like Shiba Inu And the Dogecoin It fell 6% to 8% or so on Monday morning.

Even Crypto Investors Are Watching The Federal Reserve

Most of the market participants believe that the same fears that hit the stock market are also causing the cryptocurrency markets to fall. In fact, it is possible that the two markets are part of a broader feedback loop where weakness in one market leads to more anxiety about the other.

Digital asset projects share a lot in common with some of the more speculative tech stocks, particularly among fintech companies. New cryptocurrency projects attracted large amounts of venture capital and seed funding from private sources, and this money was readily available in part because low interest rates made it easier for investors to access the capital.

Now, crypto investments and high growth stocks Share many of the same potential roadblocks. With the cost of capital rising, it will be increasingly important for companies to be able to generate their own positive cash flow in order to avoid having to go to the increasingly stingy capital markets to raise funds. Those who can do this will have a significant competitive advantage over those who have to take out the capital on much less attractive terms than they have received in past years.

Equity investors have seen these concerns manifest in larger dips in the more speculative corner of the world of high-growth stocks. Cryptocurrency investors see this in the price behavior of lesser known digital assets. But like tech giants like apple And the Amazon Not immune to a bear market in stocks, as well as Bitcoin and Ethereum were subject to the same macroeconomic challenges as smaller digital asset projects.

What monetary policy can do for crypto

If the Fed remains very aggressive in raising interest rates to curb inflation, it may confirm the bearish argument in the crypto markets as well. This could prolong the current crypto winter even longer and force innovators in the space to focus on their most profitable ideas for survival.

John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. Dan Caplinger He has positions at Amazon and Apple. Motley Fool has positions at Amazon, Apple, Bitcoin, Ethereum and Polygon. Motley Fool recommends the following options: long calls in March 2023 worth $120 on Apple and short calls in March 2023 worth $130 on Apple. Motley Fool has a profile Disclosure Policy.

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