Crypto winter melts crypto stocks

The recent chaos rippling through the cryptocurrency sector is causing a meltdown in crypto stocks. Shares of MicroStrategy (MSTR:NASDAQ), Mara Digital holdings (MARA:NASDAQ) and Riot Blockchain (RIOT:NASDAQ) all rose in Tuesday’s trading session giving investors some temporary relief in a market that has lost patience with risk assets. Shares of Mara closed 3.1% higher at $156.87. Mara finished 4.36%, while Riot blockchain rose 5.16%.

Albeit, investors may not be taking the bait to go all in, especially if the price action of these stocks within the past year is taken into consideration. So far, all the aforementioned stocks have lost 75% of their market cap within the year. Coinbase (COIN:NASDAQ) closed 0.83% lower on Tuesday, but is down by 78% within the last year.

Crypto prices have fallen to their lowest level since March 2020. Bitcoin plummeted below $23,000, while Ethereum is flirting with the $1000 price mark. Both tokens have lost almost 30% of their value within the past week. The rout in cryptocurrencies has wiped about $1trn off the crypto market.

The massive drop has also seen some exchanges suspend transactions as sellers looked to head for the exit door. Binance and Celsius both suspended withdrawals from their platform due to the huge volume of sellers hoping to get out of the market. The Terra debacle and the collapse of Luna has also shaken the confidence of investors hoping to participate in the space.

The rout in cryptocurrencies has put crypto firms under pressure with some laying off staff to keep their overhead expenses low. Coinbase stated that it was laying off 18% (about 1,100) of its staff. In a blog post announcing the layoff, Coinbase CEO, Brian Armstrong stated “We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another winter and could last for an extended period”.

Other crypto-related firms such as Blockfi, Gemini and Robinhood (HOOD:NASDAQ) are also laying off staff, as companies in the ecosystem struggle to keep their heads above water. Secondly, crypto companies are using highly leveraged strategies to generate yield, a move which may prove to be devastating.

Investors are worried that MicroStrategy, which has bet $4 billion on bitcoin, would be forced to liquidate some of its bitcoin holdings if faced with a margin call. In March, MicroStrategy borrowed $205 million in a three-year loan from crypto-focused bank Silvergate to buy more bitcoin, using its own bitcoin holdings to secure the loan.

The current macroeconomic setup characterized by high inflation and an aggressive Federal Reserve has seen investors deploying capital to other asset classes such as bonds and or holding cash. The surprise upside to headline inflation from CPI data released last Friday dispelled rumors about inflation showing signs of easing. Inflation hit 8.6%, its highest level since 1981. Consumer sentiment data released by the University of Michigan also showed that consumer confidence was at an all-time low.

Investors are now anticipating a 75-basis point hike in interest rates, which is above the 50 basis points earlier forecast. If the Fed does so, it would be the most aggressive the central bank has gone since 1984.

With a flurry of rate hikes still expected this year, the susceptibility to more drops cannot be ruled out. Wall Street has begun downgrading stocks in the space. Analysts at JP Morgan (JPM:NYSE) downgraded Coinbase stating that the company would struggle to make profit in a crypto downturn.

Given the above scenario, it appears crypto stocks would be in for a long winter. For many investors, this is a sudden crash back to reality and a cold wake-up call.