Some cryptocurrency-related stocks and exchange-traded funds rallied to start the new year, shrugging off declines in Bitcoin and its counterparts.
The crypto sector, including Bitcoin miners, exchanges, and blockchain-related companies, was generally higher on Monday. Marathon Digital Holdings (ticker: MARA), one of the largest miners, gained 1.7%. The Amplify Transformational Data Sharing ETF (BLOK) was ahead by 1%, while the ProShares Bitcoin Strategy ETF (BITO), which owns Bitcoin through futures contracts, rose 1.4%.
Yet Bitcoin and other cryptos weren’t participating in the rally. Bitcoin was down 1% to around $46,500. Ether, the second-largest crypto, was off 1% to $3,750. Major “alt-coins” also were putting in a weak performance, with Solana down 2.7% to $170 and Cardano off 1.8% to $1.33.
Cryptos may now be at a pivot point: What’s next for the tokens and stocks may depend on whether investors view them as proxies for so-called risk assets, or conversely, as inflation fighters that will hold their value while interest rates and bond yields rise.
If the crypto sector is a proxy for tech, it could be vulnerable to rising interest rates and higher bond yields, which tend to pressure risk assets. The thinking is that tech stocks and other high-growth assets look less attractive as rates increase. Higher bond yields imply greater risk-free returns from Treasuries, and they reduce the present value of future cash flows for companies with earnings expected to materialize further into the future.
Blockchain-related companies and crypto tokens fall into that category, to some extent, and they have come under pressure periodically as bond yields have spiked. Bitcoin has been weak for months. It ended the year around $48,000, down 30% from its record levels near $69,000, and it hasn’t shown much evidence of breaking out from a relatively narrow trading range.
Whether Bitcoin is inversely or positively correlated to Treasuries isn’t always clear, though. The relationship was inverted on Monday: The 10-year Treasury yield soared 11.5 basis points, or hundredths of a percent, to 1.63%, while Bitcoin slumped.
While the token has shown some “minor stabilization” in the last few days, its real test will be holding support at $45,655, according to a report published Monday by Fundstrat Global Advisors. If Bitcoin falls below that, it could drop back to last September’s lows around $39,500, while a move above $49,000 would be needed for a “larger bounce” to take hold, Fundstrat says.
The counterargument to crypto as a tech proxy is that Bitcoin could prove its mettle as a store of value in an inflationary climate, while other cryptos benefit from a variety of catalysts.
“There is no need to overthink things,” says Digital Asset Investment Management, a registered investment advisor for cryptos, in its January outlook. “We don’t think a crypto portfolio can be too overweight Bitcoin and/or Ethereum.”
Catalysts for the two largest cryptos may also become. Bitcoin continues to gain traction as an alternative asset in institutional portfolios, and it is making headway in payment networks and international money transfers. The Ethereum blockchain network could be getting a major upgrade this year, reducing its congestion and steep transaction fees, supporting higher transaction volume and potential gains in the Ether token.
Alt-coins also stand to benefit as their uses expand. Some tokens and networks, like Solana and Avalanche, are gaining momentum as alternatives to Ethereum for trading and lending based on “smart contracts.” These and other networks are also being used for decentralized finance or Defi applications, nonfungible tokens, distributed storage, and managing supply chains on blockchains.
One concern is that Bitcoin and other tokens could be entering a “crypto winter”—a long period of weak prices. Crypto markets have periodically gone through long slumps, pressured by profit-taking, technical factors, and government crackdowns.
But bulls argue that even a crypto winter would have a silver lining— consolidating the industry by phasing out some of the smaller trading platforms. Coinbase Global (COIN) could be a beneficiary, wrote Oppenheimer analyst Owen Lau in a note published on Sunday. He sees Coinbase as a survivor with opportunities to pick up market share or make acquisitions.
“While it may not be good for investors with shorter investment horizons, [a] crypto winter provides an opportunity for long-term investors to buy COIN at a relative discount,” Lau wrote.
For now, cryptos appear to be caught in competing crosswinds: as risk assets or as stores of value. Crypto performance in 2022 will hinge on which prevails.