Mega-cap tech stocks, which are off to a strong start in 2023, are now dealing with massive trillion-dollar losses, worrying their shareholders. Wall Street’s unease over rising bond yields and higher interest rates has cast a shadow over these companies. Traders are now mulling over the potential impact on bitcoin (btc) if the S&P 500’s downtrend continues.
Consequently, investors should investigate the correlation between bitcoin and the S&P 500 and consider whether cryptocurrencies can thrive in a high interest rate environment.
The seven largest tech companies, including Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla, together make up a staggering 29% of the S&P 500, marking the highest concentration ever recorded in this stock index. However, since late July, these tech giants have witnessed a substantial stocks-struggling-shedding-193038540.html” target=”_blank” rel=”noopener nofollow” data-amp=”https://ca-finance-yahoo-com.cdn.ampproject.org/c/s/ca.finance.yahoo.com/amphtml/news/magnificent-7-stocks-struggling-shedding-193038540.html”>erosion in its market value, with a staggering loss of 1.2 trillion dollars.
James DePorre real money stocks” target=”_blank” rel=”noopener nofollow”>grades that “73% of stocks in the market are more than 20% below their highs,” which technically defines a bear market. This underscores growing concerns in the broader economy, aside from the top seven stocks.
In its effort to regain credibility in the fight against inflation, 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, coupled with a widening of corporate credit spreads, could raise the likelihood of an economic recession.
Higher interest rates hit stocks, commodities
Crescat Capital has also expressed concern about the wave of corporate and sovereign debt due in 2024, which will require refinancing at substantially higher interest rates. They recommend exposure to commodities due to their historical resilience during inflationary periods, exacerbated by the challenge commodity producers face in investing in fixed assets.
Despite the huge difference in market capitalization, amounting to a total of $10.5 trillion for Apple, Microsoft, Google, Meta, Nvidia and Tesla, compared to cryptocurrencies (excluding stablecoins), which fall short by more than 9 times, there are some intriguing parallels.
First, both markets exhibit a quality of scarcity that correlates with the monetary base. In essence, both react in a similar way to the actions of the US Federal Reserve, where greater circulation benefits scarce assets, while a restrictive policy with high interest rates favors fixed income investments.
Furthermore, the trend towards digitalization has transformed the way people use mobile applications and services, particularly in financial services. Given the limited adaptability of traditional providers, often due to regulatory restrictions, it is not surprising that the public is embracing cryptocurrencies, even in the form of stablecoins. The growing demand for fully digital services is a secular trend that positively influences both the cryptocurrency and technology sectors.
Decoupling of the S&P 500 and cryptocurrencies
The performance of the top seven S&P 500 stocks can be decoupled from cryptocurrencies regardless of the time period. bitcoin is currently trading about 50% below its all-time high, while Apple and Microsoft are down 13% and 7% from their highs, respectively. This discrepancy is partly due to investor concerns about an impending recession or a preference for companies with substantial reserves, while cryptocurrencies, excluding stablecoins, lack cash flow or profits.
From an investment standpoint, stocks and cryptocurrencies inhabit different realms, but this contrast underscores how bitcoin can grow independently of retail adoption and spot exchange-traded funds (ETFs), as evidenced by investment Microstrategy’s $5.4 billion direct investment in the cryptocurrency.
Related: ‘Sodl’ Too Soon: US Government Didn’t Lose bitcoin Profits Now Total $6 Billion
The top seven tech companies collectively hold $596 billion in cash and equivalents, enough to purchase the entire circulating supply of bitcoin, assuming 3.7 million coins are lost forever. Additionally, these companies are expected to generate $650 billion in profits over the next five years. Therefore, even if those companies continue to decline, their cash position could eventually move into commodities, including bitcoin.
Meanwhile, the U.S. housing market, another pinnacle of savings for the economy, is facing its own problems due to record-high mortgage rates. Sales of existing homes in September fell at the slowest pace since October 2010, according to the National Association of Realtors.
Ultimately, a drop in the S&P 500, whether driven by mega-cap tech stocks or other factors, doesn’t necessarily spell doom for cryptocurrencies. Investors often look to diversification to mitigate risk, and bitcoin‘s low correlation with traditional markets, coupled with early signs of trouble in the real estate sector, offers an attractive condition for alternative hedges, as noted by legendary investor Stanley Druckenmiller .
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
