Mega-cap tech stocks that had a strong start in 2023 are now facing significant losses, causing concern among their shareholders. The surge in bond yields and higher interest rates have cast a shadow over these companies, leading traders to question the potential impact on Bitcoin if the S&P 500 continues to trend downwards.
In light of these developments, it is crucial for investors to explore the correlation between Bitcoin and the S&P 500 and assess whether cryptocurrencies can thrive in an environment of high-interest rates.
The seven largest tech companies, including Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla, make up a staggering 29% of the S&P 500. This concentration represents the highest ever recorded in this stock market index. However, since the end of July, these tech giants have seen a substantial erosion in their market value, resulting in a staggering $1.2 trillion loss.
Furthermore, James DePorre from Real Money notes that 73% of stocks in the market are more than 20% below their highs. This technical definition of a bear market underscores growing concerns in the broader economy beyond just the top 7 stocks.
To combat inflation and regain credibility, the Federal Reserve has indicated its intention to maintain higher interest rates for an extended period. Crescat Capital warns that a significant decline in the S&P 500, combined with a widening of corporate credit spreads, could increase the likelihood of an economic downturn.
Crescat Capital also raises concerns about the wave of corporate and sovereign debt maturing in 2024, which will require refinancing at substantially higher interest rates. They recommend exposure to commodities due to their historical resilience during inflationary periods. This recommendation is further supported by the challenge faced by commodity producers in investing in fixed assets.
Despite the vast difference in market capitalization between mega-cap tech stocks and cryptocurrencies, there are some intriguing parallels. Both markets exhibit scarcity qualities that correlate with the monetary base. Increased circulation benefits scarce assets, while a restrictive policy with high interest rates favors fixed-income investments.
Moreover, the trend towards digitalization has transformed the way people use apps and mobile services, particularly in financial services. Given the limited adaptability of traditional providers, often due to regulatory constraints, it is not surprising that the public is embracing cryptocurrencies, even in the form of stablecoins. The growing demand for fully digital services positively influences both the crypto and tech sectors.
It is important to note that the performance of the top 7 S&P 500 stocks can decouple from cryptocurrencies regardless of the time frame. Currently, Bitcoin is trading approximately 50% below its all-time high, while Apple and Microsoft are down 13% and 7% from their peaks, respectively. This discrepancy can be attributed to investor concerns about a looming recession or a preference for companies with substantial reserves, whereas cryptocurrencies lack cash flow or earnings.
From an investment standpoint, stocks and cryptocurrencies exist in different realms. However, this contrast underscores how Bitcoin can grow independently of retail adoption and spot exchange-traded funds (ETFs), as demonstrated by Microstrategy’s $5.4 billion direct investment in the cryptocurrency.
The top 7 tech companies collectively hold $596 billion in cash and equivalents, enough to purchase the entire circulating supply of Bitcoin if 3.7 million coins are lost forever. Furthermore, these companies are projected to generate $650 billion in earnings within the next five years. Therefore, even if these companies continue to decline, their cash position could eventually shift to commodities, including Bitcoin.
Meanwhile, the U.S. housing market, another pillar of the economy, is facing its own challenges due to record-high mortgage rates. Sales of previously owned homes in September dropped to the slowest pace since October 2010, according to the National Association of Realtors.
Ultimately, a downturn in the S&P 500, whether driven by mega-cap tech stocks or other factors, may not necessarily spell doom for cryptocurrencies. Investors often seek diversification to mitigate risk, and Bitcoin’s low correlation with traditional markets, along with early signs of trouble in the real estate sector, presents an attractive condition for alternative hedges, as highlighted by legendary investor Stanley Druckenmiller.
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