What happened
To say that it's a volatile day in the stock market on Tuesday would be a massive understatement. And the high-flying tech stocks of the past year or so are taking the worst of it. Fintech stocks aren't immune to the pain either, as fintech giants PayPal Holdings (PYPL +1.59%) and Square (SQ +0.17%) are down by 5% and 8%, respectively, as of 10 a.m. EST on Tuesday morning.
So what
There are two likely explanations for today's plunge in these two fintech giants.
Image source: Square.
First, we're seeing a massive sell-off in growth stocks, especially those that have performed well during the COVID-19 pandemic. And PayPal and Square certainly qualify. Even after the sharp downward moves today, these stocks are up by 113% and 180%, respectively, over the past year. The tech-heavy Nasdaq Composite index is down by more than 3% at 10 a.m. EST, and most of the stocks that have performed the best over the past year are doing much worse.
Second, both PayPal and Square are heavily involved in the cryptocurrency world, specifically Bitcoin (BTC +0.44%). Both platforms allow users to buy and sell Bitcoin, PayPal is planning to roll out the ability to pay for purchases with Bitcoin at its millions of merchants, and Square has purchased Bitcoin with some of the cash on its balance sheet. In fact, Square is such a popular Bitcoin platform that it reportedly accounts for roughly one-fourth of all United States Bitcoin transaction volume.
To be sure, Bitcoin isn't a heavy driver of profits at either company (especially PayPal), but it could be if investor interest and the value of the digital currency continues to grow. And when the price of Bitcoin moves in the wrong direction, future profit expectations can slip.
On Tuesday, Bitcoin -- which recently reached an all-time high -- is falling sharply. The leading digital currency is down by 13% for the day to about $47,000 as I write this, and other investment vehicles tied to Bitcoin are plunging as well. The publicly traded Bitcoin investment fund, Grayscale Bitcoin Trust (GBTC 1.70%) is down by more than 15% as of 10 a.m. EST.
Now what
On days like today when we're seeing a broad-based correction in stocks and other assets that have dramatically outperformed the market, it's important to take a step back and realize that moves like this are a normal part of a healthy stock market. Stocks don't always go up. This sounds simple, but given the price action we've seen in some of these high-flying companies over the past year, it's easy to forget. And just to put today's move into perspective, PayPal and Square are simply back to their levels in early February -- so it really even isn't that bad from a long-term investment perspective.
