Bitcoin erases its gains as the tech-centric Nasdaq sell off creeps into the cryptocurrency markets. Fears grow around costs of borrowing.
While yesterday was all about crypto’s diversion from Nasdaq stock movements, today, the slump in growth assets has caught up with cryptocurrencies and Bitcoin.
After a day of steep gains, global market capitalization faced a reversal in its good fortune to finish the previous 24 hours 0.78% down at $1.58 trillion.
Losses were small for the big projects. Bitcoin fell 0.9% at the time of writing, and seems to have met support at $50,000.
Ethereum was down just 0.83% to $1,581 as it struggled to break through $1,600. In the mid caps (project’s valued between $10-$40 billion) losses were more significant. Polkadot 3.4%, Bitcoin Cash 3.3% and Chainlink 4.4%.
Ripple however has been on a storm in the last few hours, adding 2.6% and increasing after the project announced it was testing a private version of XRP to help central banks build their own digital currencies.
The only green coin was Uniswap, which is up 3.7% in the last day. It looks like the continued choppiness in the broader asset markets has creeped into crypto.
Besides Bitcoin, the tech-centric Nasdaq, was decimated yesterday as it continued its losing streak this week. Apple closed down 2.3%, Google 2.5%, Amazon 2.7%, Tesla 4.7% and Paypal down 5.1%.
The problems are yield rates again. But this time they’re joined by creeping interest rates. This duo is putting pressure on the growth stocks who are now growingly looking overvalued as they absorbed investor cash during the pandemic.
As borrowing costs for firms and consumers is looking more likely to increase in 2021, the cheap cash that helped fuel the performance of the stock market over the last 12 months is causing headaches for balance sheets.
As those interest rates increase, and the value of those growth stocks slide, it makes a crunch where the cost of borrowing erases gains, leading this week’s tech sell off.
“As rates rise, as yields rise, what we’re continuing to see is this push against owning growth companies and in particular big cap technology. And I think at the outset that makes sense: It starts to shake some complacency as yields go up, and portfolio managers – especially those that are more short-term oriented – start to rethink those positions,” Jason Ware, chief investment officer of Albion Financial Group, told Yahoo Finance.
However, it’s not all bad news. Banks, which were cowering for most of 2020 over fears the billions in loans they had given out to clients and business would default didn’t. Therefore, big finance is now primed to surge as borrowing cost increases are good for the banking industry.
On top of that, financial institutions were effectively banned from paying dividends and performing stock buybacks during the pandemic, meaning these firms are awash with cash and are likely to go spending at the first opportunity.
These two elements are likely to have a big impact on crypto. The cost of borrowing going up means we’re less likely to read headlines about companies such as MicroStrategy selling debt to buy Bitcoin in vast quantities as it has been.
Second, where is all this pent up cash going to go? Will firms continue to diversify their portfolios as has been the trend over the last 12 months – with crypto being one of the major beneficiaries – or will the uncertainty and risk factor associated with buying Bitcoin et al see cash pour back into traditional stocks stifling the crypto boom? We must wait and see.