The stock market reacted negatively last week on fears of higher interest rates and a slowing economy, and it didn’t seem like the new week was going to start any differently. As of 8:45 am ET, futures contracts on the Dow Jones industry average (^DJI -0.37%), S&P500 (^GSPC -0.34%)and Nasdaq Composite (^IXIC -0.27%) was down another 1%, contributing to sizeable declines of around 4% to 5% last week.
Cryptocurrency markets haven’t helped investors much with prices of late Bitcoin (BTC -4.08%), ether (ETH -6.67%), and other well-known digital assets that offer no dead weight for diversified portfolios. In fact, Monday morning’s losses for Bitcoin and Ethereum were even more extensive than for the stock market. As a result, some investors are wondering whether the long-term promise of cryptocurrencies as a breakthrough financial innovation will be able to survive a negative cycle of tighter monetary policy and higher interest rates.
Another blow to crypto confidence
Crypto markets are open all weekend, but most of the downside in digital assets didn’t come until early Monday morning. After trading both sides of $20,000 on Saturday and Sunday, bitcoin fell as low as $1,600 early Monday, and just before the market open, the digital asset was trading at $18,800.
Ethereum struggled a bit more to hold its own over the weekend as the price started falling on Sunday. From standing around $1,450 on Friday afternoon, Ethereum lost nearly 10% of its value to trade at $1,320 just before the market open. Although Ethereum is undergoing its own fundamental changes as a result of the recently completed merge event, some of the same macroeconomic factors are impacting both cryptocurrency giants.
Other popular tokens also lost ground. Like both useful cryptos Cardano and polygon and more meme-like digital assets like Shiba Inu and Dogecoins were down about 6% to 8% as of Monday morning.
Even crypto investors are watching the Fed
Most market participants believe that the same concerns that hit the stock market are also driving cryptocurrency markets lower. In fact, it’s possible that the two markets are part of a broader feedback loop, where weakness in one market spurs further concerns about the other.
Digital asset projects have a lot in common with some of the more speculative stocks in tech, particularly at fintech companies. New cryptocurrency projects have attracted significant amounts of venture capital and seed funding from private sources, and this money has been so readily available in part because low interest rates made it easy for investors to access capital.
Now, crypto investing and high-growth stocks share many of the same potential roadblocks. In view of rising capital costs, it is becoming increasingly important for companies to generate their own positive cash flow in order not to have to borrow money on capital markets that are becoming increasingly difficult. Those who can do this have a huge competitive advantage over those who have to seek capital on far less attractive terms than in years past.
Equity investors have seen these concerns reflected in the larger declines in the more speculative corner of the high-growth equity universe. Crypto investors see it in the pricing behavior of lesser-known digital assets. But so do tech giants Apple and Amazon While not immune to the stock bear market, Bitcoin and Ethereum have also been vulnerable to the same macroeconomic challenges that smaller digital asset projects face.
What monetary policy could do with crypto
If the Fed remains very aggressive in raising interest rates to curb inflation, it could validate the bearish argument in cryptocurrency markets as well. That could extend the current crypto winter for a while longer, forcing innovators in the industry to focus on their most profitable ideas to survive.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dan Caplinger has positions at Amazon and Apple. The Motley Fool has positions in and recommends Amazon, Apple, Bitcoin, Ethereum, and Polygon. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.