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The FTX meltdown has sent the price of bitcoin and other cryptocurrencies down more than 60% this year… and the carnage has spread to publicly traded companies with exposure to digital assets.
Shares of Coinbase, Square-owner Block (SQ), top bitcoin miners Hive (HVBTF) and Riot (RIOT), crypto bank Silvergate (SI), and software firm MicroStrategy (MSTR), led by crypto evangelist Michael Saylor , have all collapsed over the past month.
But is the worst almost over? After all, volatility has been a constant in this fledgling industry. Crypto is notorious for big dips and breathtakingly epic comebacks.
This isn’t the first crypto winter, as longtime Bitcoin fans can attest. There were also massive corrections in 2018, early 2020 and summer 2021.
So, could crypto prices and stocks see a rebound in 2023? Some crypto bulls think so… but they believe investors need to have more reasonable expectations.
“It’s very clear that as an industry we need to build better products,” said Hany Rashwan, CEO of 21.co, a crypto investment firm. “The past bull market made a lot of fuss. People were chasing the exuberance.”
Still, Rashwan said he was a bit surprised the crypto carnage wasn’t worse.
As bad as the recent sell-off was (Bitcoin plunged more than 15% in November alone), Bitcoin’s price is still hovering around $17,000. This is roughly triple what prices reached in the depths of the crypto bear market in the early days of the 2020 pandemic.
“How are we still approaching $17,000? That’s saying something. It is an indication that people are still using cryptos and trying to protect assets. The trust hasn’t been shaken to the core,” Rashwan said.
Others point out that the underlying blockchain technology behind bitcoin and crypto remains solid.
“We will see some challenges for the foreseeable future. But we do expect improvements eventually. This will be a catalyst. There will be growing institutional acceptance,” said John Avery, strategy and product lead for crypto, web3 and capital markets at FIS.
Avery said he also expects more regulatory clarity for cryptos in 2023. That will ultimately be a good thing.
“There is always a need to balance innovation and investor protection,” he said. “Regulation doesn’t always solve all this. But it’s important.”
Others point out that FTX’s rapid demise should also serve to bolster the companies surviving this crypto meltdown. Coinbase, in particular, could benefit over the long term, even if the stock is currently taking a hit.
“The rapid failure of FTX will lead to further regulatory oversight and scrutiny of the sector, which we believe will ultimately lead to clearer guidelines for crypto market participants,” said Fadi Massih, vice president of the financial institutions group at Moody’s Investors Service. “This would likely benefit Coinbase given its size and more established position in the industry.”
But the crypto woes should hopefully prove to investors once and for all that bitcoin is not (and likely never will be) a replacement for the US dollar or other government-backed currencies. Cryptos are still a speculative commodity. That in itself is not a problem. But investors need to be aware of the risks.
“Cryptocurrencies have been praised by some for their decentralized nature, ease of transaction and low transaction costs, but even Bitcoin, the oldest cryptocurrency, continues to be more volatile than stocks and bonds, preventing it from being a viable store of value,” said Jason Pride, Chief Investment Officer of Private Wealth, and Michael Reynolds, Vice President of Investment Strategy at Glenmede, in a report.
Pride and Reynolds added that it is wrong to think that Bitcoin can perform well in stock market volatility. Instead, this year has proven that crypto isn’t a good hedge, especially when tech stocks tank. This also “severely limits its use as a portfolio diversifier”.
The crypto chaos comes at a time when the broader stock market has actually made a stunning comeback. Investors have cheered the prospect of smaller rate hikes from the Federal Reserve. They have also expressed hope that corporate earnings will beat forecasts as consumers and businesses continue to spend.
There will be a slew of high-profile companies to report earnings from a variety of key sectors over the coming week, including AutoZone (AZO), home builder Toll Brothers (TOL), Campbell Soup (CPB), alcoholic beverage maker Brown- Forman (BFB), GameStop (GME), Chewy (CHWY), Broadcom (AVGO), Costco (COST) and Lululemon (LULU).
However, one market strategist fears its fourth-quarter and 2023 results could disappoint Wall Street. Eventually, the Fed’s rate hikes could weigh on demand.
“The earnings shoe is starting to fall,” said Kevin Barry, chief investment officer at Summit Financial.
Barry noted that niche markets that were thought to be immune to economic pressures, particularly social media and technology, are proving to be cyclical. Facebook owner Meta Platforms, for example, has been a terrible stock this year. And the leading provider of cloud software, Salesforce (CRM), recently reported unconvincing forecasts.
Monday: US ISM Service Index; China Caixin serves PMI
Tuesday: Revenue from AutoZone, Signet (SIG), Toll Brothers, Dave & Buster’s (PLAY) and Stitch Fix (SFIX)
Wednesday: China trade data; rate decision for India; Revenue from Campbell Soup, Brown-Forman, Ollie’s Bargain Outlet (OLLI) and GameStop
Thursday: Weekly Unemployment Claims in US; Japan’s GDP earnings by Ciena (CIEN), Costco, Broadcom, Chewy and Lululemon
Friday: US Producer Price Index; China inflation; consumer sentiment in the United States of America; Revenue from Li Auto