What happened
Shares of many crypto stocks struggled today, as the price of the world's largest cryptocurrency, Bitcoin (BTC 0.96%), continued to sell off over the weekend. The price of Bitcoin traded below $32,800 as of this writing.
Shares of the large crypto exchange Coinbase Global (COIN -3.24%) traded nearly 12% lower, as of 10:38 a.m. ET today. Shares of the Bitcoin miner Riot Blockchain (RIOT 10.13%) traded about 14.5% lower and shares of the crypto bank Silvergate Capital (SI) traded 12% lower.
So what
Bitcoin is a bellwether for the entire crypto sector. Its price movement often determines the movement of other cryptocurrencies and other companies that support the sector, so when Bitcoin struggles, the entire sector tends to follow suit.
While some had hoped Bitcoin would be a good hedge for inflation -- and who knows, maybe it still will be -- the cryptocurrency has traded like many other riskier assets in the face of an extremely difficult economic backdrop. The Federal Reserve has now raised its benchmark overnight lending rate, the federal funds rate, to a range of 0.75% to 1%, and many suspect that more is coming in order to fight current high levels of inflation. Additionally, the Fed has indicated that it intends to start reducing its $9 trillion balance sheet, which ballooned during the pandemic. By September, the Fed plans to be running off $95 billion of bonds per month.
Image source: Getty Images.
All of this has resulted in surging bond yields, with the yield on the 10-year Treasury bill rising to about 3.1% as of this writing. As yields go up and with so much uncertainty, investors are ditching riskier assets and heading for safer ones that now yield more. Bitcoin has been no exception to this trend, which has dragged down much of the crypto sector.
The fears have hit many crypto stocks hard. Coinbase, which just can't seem to find a bottom, has been hitting new lows in recent days and is now down nearly 74% since going public just a little over a year ago. The large crypto exchange will report earnings after the market closes tomorrow and investors are preparing for poor results, largely due to the slowdown in crypto trading volume seen in the first quarter of the year. There could also be suspicion that the trend may continue.
Riot Blockchain, which is a Bitcoin miner, faces pressure simply because the asset it holds and mines is now worth less, while the company still must fund the hardware needed to mine Bitcoin. Silvergate Capital is the most irrational sell-off, in my opinion, as the bank has set up a real-time payments system to help institutions and exchanges trade Bitcoin more efficiently, but the bank doesn't actually hold, purchase, or mine any Bitcoin. Still, it's hard to avoid pressure in this kind of environment.
Now what
The inflationary environment, all of the moves by the Fed, Russia's ongoing invasion of Ukraine, and all of the other uncertainty have made it a tough environment for all kinds of risk and growth assets.
But I do think Bitcoin and at least a portion of other cryptocurrencies are here to stay long-term. This will make stocks like Silvergate Capital and Coinbase good picks if you believe in long-term crypto adoption because they provide critical infrastructure to support the industry.
