Cryptocurrency prices are generally volatile, but the past few weeks have been particularly tough for digital coins. Bitcoin (BTC 1.05%), Ether (ETH 1.88%), and Dogecoin (DOGE 4.15%) have all lost about 20%-30% of their value since mid-May due to several factors.
First, Tesla (TSLA +3.14%) abruptly suspended Bitcoin payments for its electric vehicles, citing concerns about the cryptocurrency's environmental impact. Second, China broadened its crackdown on cryptocurrency trades.
Image source: Getty Images.
Meanwhile, Tesla CEO Elon Musk's erratic comments about Dogecoin, Charlie Munger's criticism of Bitcoin as a currency for "kidnappers and extortionists," and NVIDIA's decision to throttle the mining efficiency of its latest GPUs all likely exacerbated that pressure.
The ongoing rotation from growth to value stocks also curbed the market's appetite for speculative cryptocurrencies, and some investors even pivoted back toward gold -- which has risen slightly in value since mid-May.
All that news might be bad for cryptocurrency investors, but the crypto crash also seems to be dragging down other tech stocks. Let's see why that's happening and what precautions investors should take.
Some tech companies are exposed to the crypto market
Tech stocks that benefited from surging cryptocurrency prices over the past year could now be getting dragged down as those prices drop. For example, Coinbase (COIN 2.53%) -- the world's largest cryptocurrency exchange -- grew its revenue 144% to $1.3 billion last year, but its growth could decelerate if cryptocurrency prices continue to decline.
Coinbase went public via a direct listing in early May with a reference price of $250. The stock opened at $381, closed at $328 on the first day, but now trades at about $240.
Image source: Getty Images.
Square (SQ 0.97%), which traditionally generates most of its revenue by processing digital payments, also relied heavily on Bitcoin sales through its Cash App to partly offset the pandemic's impact on its merchants last year.
Square's dependence on its lower-margin Bitcoin sales should wane after the pandemic passes, but the stock has still dipped nearly 10% over the past month -- even after it posted impressive first-quarter numbers in early May. Like Tesla, Square also holds some Bitcoin on its balance sheet.
Cryptocurrency mining companies like Marathon Digital and Riot Blockchain -- which are both trading at double-digit price-to-sales ratios -- also quickly lost their luster. Both stocks have declined more than 30% over the past month.
The crypto crash is curbing the market's appetite for risk
Concerns about higher bond yields, rising inflation, and tough year-over-year comparisons for companies that flourished during the pandemic sparked a sell-off across the tech sector over the past few months.
That sell-off didn't hurt the top cryptocurrencies right away. Instead, investors initially bought more cryptocurrencies as many high-growth tech stocks faltered. However, the crypto crash over the past few weeks seems to have shattered the illusion of cryptocurrencies as safe haven investments.
In turn, declining crypto prices might cause more investors to sell even more of their "riskier" investments -- especially frothy tech stocks that trade at double-digit or triple-digit price-to-sales ratios.
That's probably why Snowflake (SNOW +10.00%), one of the hottest tech IPOs of 2020, remains more than 40% below its 52-week high. The company recently posted impressive first-quarter earnings, but the stock barely advanced and still looks incredibly expensive at more than 60 times this year's sales.
Stocks like Snowflake could rally in an extreme bull market, which encourages investors to buy cryptocurrencies and other speculative investments at any price. But if cryptocurrency prices continue to fall, the market could lose its patience and appetite for unprofitable tech companies that are trading at high valuations.
Should investors avoid all tech stocks?
Faced with these challenges, investors might be tempted to sell all their tech stocks. But that would be a mistake, since many tech companies still have plenty of room to grow over the long term.
Instead, investors should stick with tech stocks that offer a good balance of growth and value, and avoid companies that are too speculative or tightly tethered to the volatile cryptocurrency market.
Simply put, cryptocurrency prices seem to be a barometer of the market's tolerance for risk. As that tolerance declines, investors should reevaluate their tech stocks and see if they're still worth owning.
