What happened
Today's inflation report sent the crypto world reeling as a sell-off hit the entire industry. Headline inflation was 0.1% month over month in August, but core inflation (which excludes energy) was up 0.6%. On a year-over-year basis, overall inflation was 8.3%. The market had rallied in recent days on hope that inflation is slowing, but that doesn't appear to be the case, at least for now.
Three of the big movers in crypto today are Coinbase Global (COIN -1.00%), which fell as much as 9.3% and is down 6.6% as of 2:30 p.m. ET; Silvergate Capital (SI 2.50%), which fell 7.4% and is now down 6.4%; and cryptocurrency Solana (SOL 5.94%), which is down 7.2% today.
So what
From a trading perspective, the move is pretty simple. Higher inflation likely means the Federal Reserve will increase interest rates for longer than investors were hoping. That results in a lower valuation for assets like stocks, especially growth stocks, and that's why the Nasdaq Composite is down 4.3% today. Crypto values are generally correlated with stocks, which is why crypto valuations plunged today.
A drop in crypto prices is generally seen as negative for Coinbase and Silvergate, which offer crypto solutions to their customers. Coinbase's trading, for example, tends to fall in down markets and that's where the company generates most of its revenue. Silvergate may not see adoption of crypto and digital banking products increase if crypto values drop.
As much as the crypto industry would like to think that it's independent of the broader market, trading has been driven by traditional financial trends like interest rates and economic activity. Given the fact that inflation is still high and the Federal Reserve is likely to act aggressively next week to increase rates, that means lower valuations for crypto and crypto-related companies.
Now what
The market is trying to grapple with multiple competing trends right now. Employment is strong and much of the economy is doing well, but inflation is high and interest rates are going up, which generally leads to a recession.
As these macro factors persist, the crypto market continues to innovate and build, which is a chaotic process. There are days when it seems like crypto could enable great innovations and others that it seems like hacks and scams are more common than real builders.
I think the crypto industry has a lot going for it long-term, but this is like investing in internet stocks in the 1990s when the industry was very immature. No one knew exactly which companies would win or what business models would be best, but it was clear there was an opportunity.
As painful as days like this are, they can also be great buying opportunities. A few years from now no one will remember a single day's drop, but investors never forget buying great companies when the market is down because that's where the big money is made.
