What happened
Shares of several cryptocurrencies and crypto stocks fell today, as fears over a persistently hawkish Federal Reserve continued, as well as how this might impact the economy in 2023.
Over the last 24 hours, the price of the world's largest cryptocurrency, Bitcoin (BTC 0.06%), had fallen 2.2% as of 10:34 a.m. ET today. The price of Bitcoin also dipped below $20,000.
Shares of large crypto exchange Coinbase (COIN 3.75%) traded roughly 5.4% lower, and shares of the crypto bank Silvergate Capital (SI 2.50%) traded roughly 6.5% lower.
Image source: Getty Images.
So what
Last Friday at the Fed's Jackson Hole Economic Symposium, Fed Chairman Jerome Powell told the market that the Fed still had work to do in its bid to tame some of the highest levels of inflation seen in 40 years. Furthermore, Powell said that the Fed's work would likely not come without some pain to the economy, because rapidly rising interest rates can hurt the labor market and increase the cost of debt. Also, many believe there is a chance that the Fed's moves will tip the economy into a more severe recession.
Prior to Powell's speech, stocks had rallied in July after data showed that inflation may be peaking, which investors thought could lead the Fed to slow the pace of its rate hikes. But now it looks like the Fed plans to remain hawkish for the foreseeable future.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, said yesterday she expects the Fed to keep hiking rates to 4% by sometime early next year, and she does not expect the Fed to cut rates in 2023.
Mester said in a speech yesterday: "It would be a mistake to declare victory over the inflation beast too soon. Doing so would put us back in the stop-and-go monetary policy world of the 1970s, which was very costly to households and businesses."
Rising interest rates have crushed cryptocurrencies and crypto stocks this year, even more so than many growth and tech stocks. Crypto went on a huge run last year, and higher rates makes riskier assets less appealing. Cryptocurrencies like Bitcoin are difficult to truly value because there is nothing actually backing many of these digital assets, which has led to more volatility.
And then, of course, the entire crypto industry is tied in a somewhat correlated fashion to Bitcoin, so its movement affects all.
Now what
The longer the Fed hikes rates, the worse it is likely to be for Bitcoin and cryptocurrencies. I would like to think that we've seen the worst of Bitcoin's sell-off, but it's too early to tell, and I could still see the price continuing to go lower in the near term. Expect volatility. But for the long term, I like Bitcoin.
As for Coinbase, while it's been a difficult year for the company, I am not entirely bearish. I think Coinbase has a lot of work to do to diversify its revenue base but ultimately believe the company will be relevant as long as crypto trading is.
I am very bullish on Silvergate Capital, which has created a proprietary real-time payments network, specifically to better facilitate crypto trading between institutional crypto traders and crypto exchanges. This network gives Silvergate lots of zero-cost deposits it can deploy into interest-earning assets, which actually makes it a huge beneficiary of rising interest rates.
Silvergate is also planning to roll out a U.S. dollar-backed stablecoin, which would be the first stablecoin from a highly regulated bank. All this means Silvergate is one of my favorite crypto stocks.
