As go stocks, so go cryptos.
and other cryptocurrencies appear increasingly linked to equity markets that are in turmoil over fears about a rapid tightening of monetary policy by the Federal Reserve.
A potential war in Ukraine also has markets on edge. And the regulatory outlook for cryptocurrencies isn't getting easier with Russia being the latest country to indicate it will tighten rules on trading and mining Bitcoin, though it may not ban either practice, according to recent comments from Russia's finance ministry.
the
Nasdaq Composite
Index, a proxy for tech, is now down more than 13% this year. Bitcoin is down 21% while
Ether
You have failed 35%. Overall, the crypto market has lost more than half its value since peaking last November at $2.9 trillion.
Tougher macro conditions amount to a stress test for crypto as an independent asset class. For now, crypto appears to be failing the test, acting more like a proxy for unprofitable tech stocks, the segment hit hardest by higher rates and tighter global liquidity.
โDuring market panics, crypto becomes a high-risk correlated asset,โ said Stรฉphane Ouellette, CEO of FRNT Financial, a crypto derivatives firm in Toronto, in an interview. โThe sector is still viewed as probably the most risky investment in your portfolio. It's something that people sell to de-risk and go to cash.โ
The selling in Bitcoin isn't just due to spillover from equity markets. Bitcoin is used as collateral for trading billions of dollars worth of โalt-coinsโ on DeFi platforms and other exchanges. Alt-coins have been tanking far more than Bitcoin. As those prices fall, traders may have to liquidate Bitcoin to meet collateral or margin requirements.
Solarium,
for instance, it went from a market cap of $25 million when it launched in March 2020 to $78 billion at its peak last November. Its blockchain network has become a haven for lightning-fast trading and NFTs, but it has continued to suffer from episodic outages and congestion, including one this past weekend as Bitcoin prices tanked.
The Solana network's coin is now deflating, worth around $30 billion as its price tumbled from peaks around $260 last November to $91 in recent trading.
โSolana is an unproven blockchain โ it could be great technology, but it's very early, and to say it's even a $50 billion asset seems really rich,โ said Ouellette. โYou can make a fundamental argument for Bitcoin at these levels, but the bogeyman is the highly speculative alt-coins. Will Shiba Inu trade at over $10 billion forever? It's unlikely these things will hold their valuations long-term.โ
Crypto-related equities are also ailing as the underlying tokens lose value. Some analysts are now cutting revenue estimates and prices for the stocks.
Mizuho Securities' Dan Dolev cut his target on
CoinbaseGlobal
(ticker: COIN), for instance, to $220 from $300, while maintaining a Neutral rating on the shares. โRenewed signs of a 'crypto desert' alongside declining yield makes COIN especially unattractive,โ he wrote in a note published Tuesday, referring to trading-related revenue as โyield.โ He sees โsignificant downside to consensus revenue expectationsโ for the first quarter.
Coinbase stock was trading around $186, down 2.8% on Tuesday, taking its year-to-date decline to more than 26%.
Citigroup also recently cut its target on Coinbase, taking it to $300 from $415.
One holdout is Piper Sandler's Richard Repetto, who on Tuesday reiterated an Overweight rating and $440 target on shares of Coinbase.
โWe believe the pace of mainstream crypto/digital asset adoption remainsstrong and that COIN is likely to be the 'on ramp' for all things crypto going forward,โ he wrote in a note. โWe suspect the stock's correlation to both Bitcoin and risk assets will decouple over time as COIN diversifies revenues.โ
UBS, meanwhile, raised its price target on
Signature Bank
(SBNY) to $484 from $442, largely due to the bank's growing exposure to crypto services.
UBS noted that Signature now has $25 billion in digital-assets deposits, including nearly $6 billion in the fourth quarter. โThis growth would be impressive at any time but is particularly powerful with the backdrop of a massive crypto price correction,โ UBS analyst Brock Vandervliet wrote in a note on Jan. 21.
Signature's stock is holding up much better than pure-play Bitcoin miners and other crypto-related stocks. It's down just 5.9% this year, though it was losing ground on Tuesday as negative sentiment continued to weigh on crypto and equities alike.
Write to Daren Fonda at daren.fonda@barrons.com
