The stock market reacted negatively last week to fears of higher interest rates and a slowing economy, and it didn’t look like the new week would start any differently. Starting at 8:45 a.m. ET, futures on the Dow Jones Industrial Average (^ DJI 0.00%), S&P500 (^GSPC -0.72%)and Nasdaq Compound (^IXIC 0.00%) had fallen another 1%, adding to significant declines of around 4% to 5% last week.
Cryptocurrency markets haven’t been much help to investors lately, with prices of Bitcoin (BTC -4.60%), Ethereum (ETH -7.17%), and other well-known digital assets providing no ballast for diversified portfolios. Indeed, the losses for Bitcoin and Ethereum on Monday morning were even greater than for the exchange. This has some investors wondering if the long-term promise of cryptocurrencies as a game-changing financial innovation will be able to survive an adverse cycle of tighter monetary policy and higher interest rates.
Another blow to crypto confidence
Crypto markets are open all weekend, but most of the drop in digital assets didn’t happen until early Monday morning. After trading either side of $20,000 on Saturday and Sunday, Bitcoin fell as low as $1,600 early Monday, and shortly before the exchange opened, the digital asset was trading at $18,800.
Ethereum struggled a bit more over the weekend as its price started to decline on Sunday. From its level of around $1,450 on Friday afternoon, Ethereum lost almost 10% of its value, trading at $1,320 just before the exchange opened. Although Ethereum has its own fundamental changes underway following the recently completed merger event, some of the same macro factors affect both cryptocurrency giants.
Other popular tokens also lost ground. Both useful cryptos like gimbal and Polygon and more meme digital assets like shiba inus and Dogecoin were down around 6% to 8% on Monday morning.
Even crypto investors are watching the Fed
Most market participants believe that the same concerns that have hit the stock market are also driving cryptocurrency markets lower. Indeed, it is possible that the two markets are part of a larger feedback loop in which weakness in one market triggers new concerns about the other.
Digital asset projects have a lot in common with some of the most speculative stocks in the tech sector, especially among fintech companies. New cryptocurrency projects have attracted massive amounts of venture capital and seed funding from private sources, and this money was so 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 hurdles. As the costs of capital rise, it will be increasingly important for companies to be able to generate their own positive cash flow in order to avoid having to resort to increasingly tight capital markets to raise funds. funds. Those who can do so will have a huge competitive advantage over those who have to raise capital on much less attractive terms than they have received in recent years.
Equity investors have seen these worries play out in the steepest declines on the more speculative side of the high-growth stock universe. Crypto investors see it in the price behavior of lesser-known digital assets. Yet just like tech giants like Apple and Amazon have not been immune to the equity bear market, just as Bitcoin and Ethereum have been vulnerable to the same macro challenges faced by smaller digital asset projects.
What monetary policy could do to crypto
If the Fed remains very aggressive in raising interest rates to fight inflation, it could also confirm the bearish argument in cryptocurrency markets. This could extend the current crypto winter a bit longer and force innovators in the space to focus on their most profitable ideas to survive.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Dan Caplinger has positions at Amazon and Apple. The Motley Fool holds positions and endorses Amazon, Apple, Bitcoin, Ethereum, and Polygon. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
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