Why Bitcoin, Coinbase, and Silvergate Capital Are Falling Today
What happened
Shares in several cryptocurrencies and crypto stocks fell today, as fears of a persistently hawkish Federal Reserve continued, as well as how this could affect the economy in 2023.
Over the past 24 hours, the price of the world’s largest cryptocurrency, Bitcoin (BTC -1.36%), had fallen 2.2% by 10:34 a.m. ET today. The price of Bitcoin also fell below $20,000.
Share of major crypto exchange Coin base (COIN -6.54%) traded about 5.4% lower, and shares in the crypto bank Silvergate capital (SAY -8.19%) traded around 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 effort to tame some of the highest levels of inflation seen in 40 years. Furthermore, Powell said the Fed’s work would likely not come without some pain for the economy, because rapidly rising interest rates could hurt the labor market and raise debt costs. Many also believe there is a chance the Fed’s move will tip the economy into a more severe recession.
Before Powell’s speech, stocks had risen in July after data showed inflation may be peaking, which investors believed could lead to the Fed slowing the pace of rate hikes. But now it appears the Fed plans to remain hawkish for the foreseeable future.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, said yesterday that she expects the Fed to hold rate hikes to 4% until 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. To do so would put us back in the stop-and-go monetary policy world of the 1970s, which was very costly for households and businesses.”
Rising interest rates have crushed cryptocurrencies and crypto stocks this year, even more so than many growth and technology stocks. Crypto went on a big run last year, and higher prices make riskier assets less attractive. 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 way to Bitcoin, so the movement affects everyone.
What now
The longer the Fed raises interest rates, the worse things are likely to be for Bitcoin and cryptocurrencies. I’d like to think we’ve seen the worst of Bitcoin’s selloff, but it’s too early to tell and I can still see the price continuing to go lower in the near future. Expect volatility. But in the long term, I like Bitcoin.
As for Coinbase, although it’s been a rough year for the company, I’m 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 payment network specifically to better facilitate crypto trading between institutional crypto traders and crypto exchanges. This network gives Silvergate plenty of zero-cost deposits it can deploy to interest-earning assets, effectively making it a big beneficiary of rising interest rates.
Silvergate also plans to roll out a US dollar-backed stablecoin, which will be the first stablecoin from a highly regulated bank. All this means that Silvergate is one of my favorite crypto stocks.
Bram Berkowitz holds positions in Bitcoin and Silvergate Capital Corporation. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global, Inc. The Motley Fool recommends Silvergate Capital Corporation. The Motley Fool has a disclosure policy.
