A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.
The FTX meltdown has sent the price of bitcoin and other cryptocurrencies down more than 60% this year … and the carnage has spread to listed companies with exposure to digital assets.
Shares in 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 plunged. the last month.
But is the worst almost over? After all, volatility has been a constant in this nascent industry. Crypto is notorious for huge plunges and astonishingly epic comebacks.
This is not the first crypto winter, as long-term fans of bitcoin can attest. There were massive corrections in 2018, early 2020 and summer 2021 as well.
So, could crypto prices and stocks rebound in 2023? Some crypto bulls think so… but they think 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. “There has been a lot of fluff in the last bull market. People chased exuberantly.”
Still, Rashwan said he’s a little surprised the crypto bloodbath hasn’t been worse.
As bad as the recent selloff has been (bitcoin plunged more than 15% in November alone), the price of bitcoin is still hovering around $17,000. That’s roughly triple where prices were at the depths of the crypto bear market in the early days of the 2020 pandemic.
“How are we still approaching $17,000? That says something. It is an indication that people are still using crypto and trying to protect assets. Trust has not been shaken to the core, Rashwan said.
Others point out that the underlying blockchain technology behind bitcoin and crypto remains solid.
“We are going to see some challenges in the foreseeable future. But we expect improvements eventually. This will be a catalyst. There will be increasing institutional adoption,” said John Avery, strategy and product manager for crypto, Web3 and capital markets at FIS.
Avery said he also expects to see more regulatory clarity for crypto in 2023. That will ultimately be a good thing.
“There is always a need to balance innovation and investor protection,” he said. “Regulation does not always solve all of this. But it is important.”
Others point out that the swift demise of FTX should also serve to strengthen the companies that survive this crypto meltdown. Coinbase in particular could end up benefiting in the long term, even if the stock is about to take a beating.
“FTX’s rapid failure will invite further regulatory oversight and scrutiny of the sector, which we expect will ultimately translate into clearer guidelines for crypto market players,” said Fadi Massih, vice president of the financial institutions group with Moody’s Investors Service. “This is likely to benefit Coinbase, given its size and more established position in the sector.”
But the problems in crypto should hopefully prove once and for all to investors that bitcoin is not (nor will it ever be) a substitute for the US dollar or other government-backed currencies. Cryptos are still a speculative asset. It is not a problem in itself. But investors just need to know the risk.
“Cryptocurrencies have been lauded by some for their decentralized nature, ease of transactions and low transaction costs, but even bitcoin, the oldest cryptocurrency, continues to be more volatile than stocks and bonds, ruling it out of 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 hold up well during stock market volatility. Instead, this year has proven that crypto is not a good hedge, especially when tech stocks tank. So it “greatly limits its use as a portfolio diversifier.”
The chaos in crypto comes at a time when the broader stock market has actually had a fantastic comeback. Investors have cheered the prospect of smaller rate hikes from the Federal Reserve. They have also expressed hope that corporate profits will top forecasts as consumers and businesses continue to spend.
There will be a number of high-profile companies reporting earnings this coming week across a number of key sectors, including AutoZone ( AZO ), homebuilder Toll Brothers ( TOL ), Campbell Soup ( CPB ), alcoholic beverage maker Brown-Forman ( BFB ). ), GameStop ( GME ), Chewy ( CHWY ), Broadcom ( AVGO ), Costco ( COST ), and Lululemon ( LULU ).
But one market strategist is concerned that results for the fourth quarter and 2023 could disappoint Wall Street. The Fed’s rate hikes may eventually take a toll on demand.
“The earnings shoe is starting to drop,” said Kevin Barry, chief investment officer at Summit Financial.
Barry noted that parts of the market that were thought to be immune to economic pressures, especially social media and technology, are turning out to be cyclical after all. Facebook owner Meta Platforms has been a terrible stock this year, for example. And cloud software leader Salesforce ( CRM ) recently reported overwhelming guidance.
Monday: US ISM services index; China Caixin services PMI
Tuesday: Earnings from AutoZone, Signet (SIG), Toll Brothers, Dave & Buster’s (PLAY) and Stitch Fix (SFIX)
Wednesday: China trade data; India rate decision; revenues from Campbell Soup, Brown-Forman, Ollie’s Bargain Outlet (OLLI) and GameStop
Thursday: US Weekly Jobless Claims; Japan GDP revenue from Ciena (CIEN), Costco, Broadcom, Chewy and Lululemon
Friday: US producer price index; China inflation; US U. of Michigan consumer sentiment; earnings from Li Auto