2022 has been ugly for the stock market, and after a volatile week to start out the month of May, investors came back to Wall Street on Monday without much in the way of confidence. As of 12:30 p.m. ET, the Nasdaq Composite (^IXIC -0.64%) was down another 2.7% after having been down even further earlier in the day.
The rout in technology stocks and other high-growth companies continued on Monday, as investors kept focusing on the potential impact of higher interest rates on long-term growth and economic conditions. However, other financial markets have also seen pressure from the current macroeconomic and geopolitical situation. Cryptocurrencies were a big loser on Monday as well, and as you'll see in more detail below, those declines had a negative impact on crypto stocks Coinbase Global (COIN -0.34%) and MicroStrategy (MSTR -2.00%).
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Why crypto weighed on the markets
Cryptocurrencies were broadly lower, even among the most popular and highest-profile digital assets. Bitcoin (BTC -0.07%) dropped nearly $2,300 to $32,300, while Ethereum (ETH -0.01%) was down more than $150 to fall below the $2,400 mark. Losses for smaller digital assets were even more pronounced, with Shiba Inu and Polkadot falling more than 14%.
Part of the problem with the crypto market is that it has been highly correlated to the fortunes of the Nasdaq lately. Because blockchain has substantial technological elements to it, it's natural for investors to think of it as having similar prospects to other types of cutting-edge technology. With the Nasdaq having so many of those high-growth tech stocks, it makes sense that correlations could be high.
Yet there were also some crypto-specific issues that hit markets over the weekend. In particular, the stablecoin TerraUSD caused ripples across the asset class when it briefly lost its peg to the U.S. dollar. That sent the value of the related Luna cryptocurrency plunging, and it remains down almost 14% Monday afternoon. If investors can't count on stablecoins being freely exchangeable for their corresponding amount of fiat currency, cryptocurrency markets face a challenge they'll have to resolve in order to attract more mainstream adoption.
Companies counting on crypto
The ripple effects of cryptocurrency fluctuations weighed on stocks of companies that rely on healthy market conditions for digital assets. Coinbase has become one of the most prominent cryptocurrency exchanges in the global market, but it relies on transaction volume to drive much of its revenue. With sales based on percentages of total trades, adverse market conditions that force crypto traders to cut back on their buying and selling have a direct negative impact on Coinbase's health. That's a big part of why the stock is down more than 15% Monday afternoon.
In addition, some companies have turned to Bitcoin and other digital assets as alternatives to U.S. dollar cash holdings. MicroStrategy in particular has become famous for its devotion to Bitcoin, holding 129,218 tokens as of March 31. Today's losses alone work out to more than $250 million in reduced value for MicroStrategy, and given that the company has taken on leverage to buy more cryptocurrency and has a market capitalization of just $2.7 billion, the volatile fluctuations in Bitcoin's value create substantial financial risk if crypto prices don't reverse higher in short order. Shares of MicroStrategy were down 19%.
Many investors have dismissed cryptocurrencies as poor alternatives to other investment assets. However, even if you don't hold crypto yourself, the market has become large enough that disruptions can have impacts on other financial markets. That makes it important to keep your eyes on the cryptocurrency arena as you try to put together the best portfolio for your needs.
