What happened
Shares of several crypto stocks moved higher Tuesday, largely because traders started to get hopeful that the Fed might pivot toward a less aggressive fiscal policy, which would likely help cryptocurrencies and tech stocks.
Shares of crypto exchange Coinbase (COIN 12.96%) were trading nearly 10% higher as of noon ET. Meanwhile, shares of crypto-focused bank Silvergate Capital (SI 6.79%) were up nearly 6%, and shares of Hut 8 Mining Corp (HUT 8.90%) were up 8.4%.
So what
The Reserve Bank of Australia surprised investors Tuesday morning when it only increased its benchmark rate by 25 basis points (0.25 percentage points) instead of the 50-basis-point hike that most experts had been expecting. This gave hope to investors that perhaps the Federal Reserve might begin to slow its interest rate hikes soon as well.
Image source: Getty Images.
“The cash rate has been increased substantially in a short period of time,” Philip Lowe, the governor of the Reserve Bank of Australia, said in a statement. “One source of uncertainty is the outlook for the global economy, which has deteriorated recently.”
Rapid interest rate hikes by the Fed have crushed riskier assets like tech stocks and cryptocurrencies such as Bitcoin. Shares of Coinbase, Silvergate Capital, and Hut 8 — all companies that make their money in the crypto industry — have taken a beating as well.
The Fed is still projected to boost the benchmark federal funds rate by a total of 1.25 percentage points at its final two meetings of 2022. But if it takes a less aggressive course, stocks will likely benefit, as investors have been looking for signs that the period of rapid rate hikes will soon be over.
Coinbase also seems to be benefiting from the news that board member Tobias Lütke (who is also the CEO of Shopify) has been heavily buying the dip on the stock, which is down more than 71% this year. On average, Lütke has purchased $369,000 of Coinbase stock every week for the last two months.
In other company-specific news, Bitcoin miner Hut 8 announced Tuesday that it mined 277 Bitcoin in September, almost 100 Bitcoin fewer than it mined in August.
In its September update, Hut 8 also said that following Ethereum’s merge to a proof-of-stake governing mechanism, the company is contemplating moving some of its hardware into its data centers to improve its computing power.
Now what
I’m not sure that the Reserve Bank of Australia’s decision to slow the pace of its rate hikes necessarily presages a similar move by the Fed, but I do think that such a shift is possible if the inflation reports for September and October show that U.S. inflation is receding meaningfully.
Also keep in mind that the Australian central bank’s pivot came in part due to concerns about the economic outlook, which has deteriorated. A mild recession might actually help stocks, but a severe recession in 2023 could send them lower.
Coinbase, Silvergate, and Hut 8 all stand to benefit if the price of Bitcoin goes up and if there is more demand and trading activity around cryptocurrencies.
My favorite company in this group, however, is Silvergate Capital, which has developed a real-time payments platform that better facilitates crypto trading between hedge funds and large crypto exchanges. That payments system brings clients to Silvergate with large sums of cheap deposits that Silvergate can invest to earn higher yields. If interest in crypto revives, more deposits should flow into its accounts.
Bram Berkowitz has positions in Bitcoin, Ethereum, and Silvergate Capital Corporation. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Inc., Ethereum, and Shopify. The Motley Fool recommends Silvergate Capital Corporation and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.