Why crypto stocks plunged today

What happened

Today’s inflation report sent the crypto world reeling as a selloff hit the entire industry. Headline inflation was 0.1% month-on-month in August, but core inflation (which excludes energy) was up 0.6%. On an annual basis, overall inflation was 8.3%. The market had rallied over the past few days on the hope that inflation is easing, but that doesn’t appear to be the case, at least for now.

Three of the big movements in crypto today are Coinbase Global (COIN -8.84%)which fell as much as 9.3% and is down 6.6% at 2:30 PM ET; Silvergate capital (SAY -8.04%), which fell 7.4% and is now down 6.4%; and cryptocurrency Solana (SUN -9.54%)which is down 7.2% today.

So what

From a trading perspective, the move is quite simple. Higher inflation likely means the Federal Reserve will raise interest rates longer than investors hoped. That results in a lower valuation for assets like stocks, especially growth stocks, and that’s why Nasdaq Composite is down 4.3% today. Crypto values ​​are generally correlated with stocks, which is why crypto values ​​plunged today.

A fall 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 bear markets, which is where the company generates most of its revenue. Silvergate may not see the use of crypto and digital banking products increase if crypto values ​​fall.

As much as the crypto industry would like to think it is independent of the broader market, trading has been driven by traditional financial trends such as interest rates and economic activity. Given the fact that inflation remains high and the Federal Reserve is likely to act aggressively next week to raise interest rates, that means lower valuations for crypto and crypto-related companies.

What now

The market is trying to contend with several competing trends right now. Employment is strong and much of the economy is doing well, but inflation is high and interest rates are rising, 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 that crypto can enable great innovations and others that it seems that hacks and scams are more common than real builders.

I think the crypto industry has a lot going for it in the 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 which business models would be best, but it was clear there was a possibility.

As painful as these days are, they can also be good buying opportunities. In a few years, no one will remember a single day’s downfall, but investors never forget to buy great companies when the market is down because that’s where the big money is made.