The stock market reacted negatively last week to fears of higher interest rates and a slowing economy, and it didn’t appear that the new week would begin any differently. As of 8:45 a.m. ET, futures contracts on the Dow Jones Industrial Average (^DJI 0.00%), S&P 500 (^GSPC -0.72%), and Nasdaq Composite (^IXIC 0.00%) had moved down another 1%, adding to sizable declines of roughly 4% to 5% last week.
The cryptocurrency markets haven’t helped investors much lately, with prices of Bitcoin (BTC -5.56%), Ethereum (ETH -7.88%), and other well-known digital assets failing to provide any ballast for diversified portfolios. Indeed, the losses for Bitcoin and Ethereum Monday morning were even more extensive than for the stock market. That has some investors wondering whether 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 hit to crypto confidence
Crypto markets are open all weekend long, but most of the downward move in digital assets didn’t come until early Monday morning. After trading on either side of $20,000 on Saturday and Sunday, Bitcoin fell as much as $1,600 early Monday, and shortly before the stock market’s open, the digital asset was trading at $18,800.
Ethereum had slightly more trouble holding its own over the weekend, as its price began to slide 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 open. Although Ethereum has its own fundamental changes going on as a result of the recently completed Merge event, some of the same macroeconomic factors affect both of the cryptocurrency giants.
Other popular tokens also lost ground. Both useful cryptos like Cardano and Polygon and more meme-ish digital assets like Shiba Inu and Dogecoin were down 6% to 8% or so Monday morning.
Even crypto investors are watching the Fed
Most market participants believe the same concerns that have hit the stock market are also leading cryptocurrency markets lower. Indeed, it’s possible that the two markets are part of a broader feedback loop in which weakness in one market spurs further worries about the other.
Digital asset projects share a lot in common with some of the more speculative stocks in the technology space, particularly among fintech companies. New cryptocurrency projects have attracted considerable amounts of venture capital and seed financing from private sources, and that money was so readily available in part because low interest rates made it easy for investors to get access to capital.
Now, crypto investments and high-growth stocks share many of the same potential roadblocks. As costs of capital rise, it will be increasingly important for enterprises to be able to generate their own positive cash flow in order to avoid having to go to increasingly stingy capital markets to raise money. Those that can do so will have a huge competitive advantage over those that have to scrounge for capital on far less attractive terms than they’ve received in past years.
Stock investors have seen those worries show up in the bigger declines in the more speculative corner of the high-growth stock universe. Crypto investors are seeing it in the price behavior of less well-known digital assets. Yet just as tech giants like Apple and Amazon haven’t been immune from the bear market in stocks, so, too, have Bitcoin and Ethereum been vulnerable to the same macroeconomic challenges facing smaller digital asset projects.
What monetary policy could do to crypto
If the Fed remains highly aggressive in boosting interest rates to clamp down on inflation, it could confirm the bearish argument in the cryptocurrency markets as well. That could extend the current crypto winter a while longer and force innovators in the space to focus on their most profitable ideas in order 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 in 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.