What happened
Turbulence continues in the crypto market and on Tuesday the market turned lower. Major cryptocurrencies were down, but smaller names dropped double digits in some cases. A Securities and Exchange Commission (SEC) investigation into Coinbase Global (COIN 4.13%) has led to at least some of the selling, but a drop in growth stocks hasn't helped either.
As of 1 p.m. ET, Near Protocol (NEAR 6.78%) was down 8.8%, Polygon (MATIC 4.02%) had dropped 10.7%, and ApeCoin (APE 6.36%) had fallen 10.6% in trading.
So what
The biggest news is that the SEC is investigating Coinbase's listing of multiple cryptocurrencies that it sees as securities. It's not clear which cryptocurrencies the SEC is worried about, but Coinbase can list digital assets, not securities. The fact that regulators are coming after the exchange is concerning because no one knows exactly what the rules are today.
Regulation has been generally considered a good thing for crypto, but the SEC isn't creating regulation here, it's enforcing laws that were on the books decades before cryptocurrency was a concept. The problem is that someone is going to be the SEC's test case and right now the biggest publicly traded crypto exchange is in focus.
Near, Polygon, and ApeCoin are all in different positions in this regulatory mess. Near Protocol is a Layer 1 blockchain that developers can build on, but regulation will determine what can be built and what can't, potentially limiting growth and innovation. Polygon is a Layer 2 on Ethereum, which is meant to be scalable. But if innovation stalls on the Layer 1, a Layer 2 serves little use. ApeCoin is a Yuga Labs specific token for the Bored Ape Yacht Club metaverse project, The Otherside, which is still in development. Again, it's unclear how the SEC views tokens for games, so this crypto faces uncertainty.
It hasn't helped that technology and growth stocks have dropped today, which normally correlates with a drop in crypto prices.
Now what
The crypto market is in an odd position from a regulatory standpoint and as it waits on earnings. No crypto investor should be excited about the SEC probing Coinbase, but in general the regulation proposals in both the U.S. and Europe have been fairly pro-cryptocurrencies. In the long term, that could lead to action from Congress that defines rules that are currently extremely opaque, but that clarity isn't evident today.
Investors should also be watching earnings season, which has shown mixed results for most companies. Energy and industrial companies are doing well, but tech stocks that have been highly correlated to crypto values have been struggling. Companies are cutting staff, including the once impenetrable Shopify, which surprised investors today by announcing it would cut its headcount by about 10%.
It's not clear whether this cost-cutting means the economy is heading into a recession or if tech companies expanded too aggressively during the pandemic, but investors are concerned this isn't the last shoe to drop.
I'll be watching the outcome of the investigations into Coinbase because it's not just Coinbase that will be impacted by the outcome. Investors could see the value of some cryptocurrencies drop if they're deemed securities and it's unclear what would happen next. The one certainty is that the market will be volatile.