What happened
The market is having a rough day today and that has extended to cryptocurrency and related companies. The big news is higher-than-expected inflation, causing investors to speculate that interest rates will be going up significantly later this year.
Bitcoin (BTC -0.72%) has fallen 4.3% in the last 24 hours as of 12:50 p.m. ET and it’s holding up better than most cryptocurrencies. Some are down double digits and there seems to be no bottom for this crypto winter in sight. Coinbase Global (COIN -7.92%) has fallen 8% and Silvergate Capital (SI -2.22%) is off 4.8%. The two stocks traded down as much as 9.4% and 6.7% respectively.
Image source: Getty Images.
So what
The inflation data was surprising this morning with the consumer price index up 8.6% in May compared to a year ago and up 6% after taking out food and energy costs. That combined with a University of Michigan consumer sentiment survey index that fell from 58.7 in May to 50.2 in June. For this particular index, this is the lowest reading since the survey began in 1952.
High inflation and a relatively weak consumer is causing investors to worry that the economy is headed into (or already in) a recession. This could mean declining economic activity and lower revenue for companies just as costs are going up.
To make matters worse, the Federal Reserve may be forced to increase interest rates in reaction to the inflation news.
Clearly, Bitcoin has proven not to be a hedge against inflation now that inflation is here. But companies like Coinbase and Silvergate are still building their businesses and could take market share if the crypto economy rebounds in the future.
Now what
I wouldn’t read too much into the sell-off of these three assets today because the entire market is down big. But the market could be in for a much longer correction as investors pull out of risky assets and focus on stable businesses with strong cash flows.
The good news for investors in cryptocurrency is that the industry continues to mature and companies like Coinbase and Silvergate are building business models that could endure over the long term. That said, they’re likely in for some lean months ahead as traders exit the market and the crypto holders who remain hold on for dear life.
Investors are likely to see more cost-cutting and weak results ahead in crypto, but long-term I still like where the industry is headed. That said, it may take a few years for stock prices to bounce back to levels seen only a few months ago.