Crunch time for cryptocurrency stocks as growth slows and interest rates rise

A bear market for tech stocks is smashing crypto-related investments with carnage among a range of recent listings.

Iris Energy's Dan and Will Roberts listed their renewable energy bitcoin mining company on the Nasdaq with a valuation of more than $1bn. Picture: Tim Hunter.

A bear market has settled in for tech stocks as the Federal Reserve turns hawkish. It doesn’t bode well for bitcoin and other cryptocurrencies.

The Nasdaq Composite Index has now slumped more than 20 per cent from its peak last November, putting the tech-heavy benchmark in a bear market. That understates the carnage in tech, however, as many prominent stocks have lost more than half their market value, including Netflix and PayPal.

Tech is suffering under a barrage of negative pressure: high valuations, slowing growth and rising interest rates. There also are deepening concerns the Federal Reserve will tip the economy into a recession through its tightening of monetary policy, removing much of the stimulus it deployed during the pandemic.

All of it is aimed at taming inflation, of course, while allowing the economy to continue to grow. But that kind of “soft landing” is looking less likely.

Macro headwinds could make it much tougher for bitcoin and other cryptos to revive from their own bear market. Bitcoin, at around $US39,000 ($53,877), is down 16 per cent this year. It remains down more than 40 per cent from its peak last November near $US69,000. Ether, the native token of the Ethereum network, is down about 40 per cent.

Smaller cryptos are faring worse, with solana and avalanche, two of the largest “alt coins”, both off more than 50 per cent from peak prices.

Bitcoin and the S&P 500 are closely correlated to global money supply, according to Stifle chief equity strategist Barry Bannister.

Indeed, a chart of global M2 money supply since 2014 overlaid against both the S&P 500 and bitcoin shows them to be in sync – with stocks and bitcoin rising and falling in tandem as the money supply expands and contracts.

Bitcoin is even more sensitive to changes in money supply than stocks, according to Bannister. A more hawkish Fed and strengthening dollar will both exert downward pressure on the money supply, he notes.

“As Fed policy normalises and inflation stays high, market returns will drop to zero, compounded, for the next 10 years,” he said in a recent interview. “The time to buy bitcoin is when the Fed pivots to a dovish stance. As long as the Fed is tight, bitcoin always suffers.”

Bannister has been bearish for some time – as early as 2018. Investors who stayed in cash back then would have missed a huge rally in stocks and bitcoin.

But this tightening cycle is likely to be longer and tougher on “risk assets” than prior ones. This week the Fed hiked rates by 0.5 percentage points, bringing the US indicator rate to 1 per cent.

Moreover, the war in Ukraine, global supply-chain problems, and ongoing lockdowns in China related to Covid also make the outlook less favourable.

Crypto-related stocks are feeling the brunt of the tougher macro climate.

Coinbase Global is down more than 65 per cent from its 2021 peak. Other hard-hit stocks include crypto trading apps such as BlockSQ, PayPal and Robinhood Market; bitcoin mining stocks like Riot Blockchain and exchange-traded funds like the Bitwise Crypto Industry Innovators fund and Amplify Transformational Data Sharing ETF.

Iris Energy – an Australian-controlled, Nasdaq-listed sustainable energy-focused bitcoin mining stock – floated at $US28 last November. Backed by former Macquarie Bank brothers Will and Dan Roberts, along with the ubiquitous Mike Cannon-Brookes, it was trading near $US10 this week.

While the near term doesn’t look great, the markets could rally in the third and fourth quarter after the Fed’s rate medicine is more widely absorbed by the markets and inflation moderates.

Bitcoin has had a few good performances in May. According to CoinDesk, prices have risen in seven of the past 11 years during the month of May.

This is an edited version of a feature from Barron’s