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The survey concluded that the Fed’s quantitative tightening used to curtail inflationary threats could be bad for crypto and tech stocks.
According to a recent survey, crypto and tech stocks are vulnerable to quantitative tightening. This is due to the high likelihood that the US Federal Reserve will raise interest rates once again to combat soaring inflation. The MLIV Pulse survey made the conclusion after sampling opinions from 687 contributors.
Quantitative Tightening, Crypto & Tech Stocks
Under its latest outlook of increasing interest rates, the Federal Reserve started cutting down its asset holdings this month. This process, which also involves leaving assets to mature without subsequent reinvestments is quantitative tightening. Furthermore, the process could reduce the valuation of tech stocks that are heavily dependent on future prospect optimism. In addition, because crypto also has a notable correlation with tech stocks, the Fed’s quantitative tightening could also similarly impact digital currencies.
Consequently, most market observers classified crypto and tech stocks as the most at-risk assets. Conversely, just 7% of these same observers viewed mortgage-backed bonds as risky.
The increasing correlation between crypto and tech stocks does not bode well for digital assets. In addition, the correlation of digital assets with indexes like the Nasdaq Composite and Nasdaq 100 also sullies the argument that the crypto community can use digital assets like gold, to hedge against inflation. Back in April, senior market analyst at Oanda Asia-Pacific Pte, Jeffrey Halley spoke on the correlation between crypto and inflation. Halley said:
“It could well be that as Bitcoin is tested in a high inflation, rising rate environment for the first time, investors are choosing tradition over a new frontier. Gold has been an inflation hedge for millennia.”
Furthermore, some analysts from Bank of America also watered down the argument that Bitcoin could serve as an inflation hedge. According to Alkesh Shah and Andrew Moss, Bitcoin is a risk asset. Bitcoin’s pronounced correlation with the S&P 500, Nasdaq 100, and negative correlation with the growing commodity markets make it susceptible to market forces. Such is the case with the widely-anticipated quantitative tightening that looms over crypto and tech stocks.
Tech Stock Decline
Crypto and tech stocks both got big boosts from the financial stimulus of the Covid era. The policy easing led to the Nasdaq 100 index surging by more than 130% from lows in March 2020. However, since May 10th, tech stocks have lost more than $1 trillion in market value. Analysts expect the loss to continue increasing.
American consumer electronics giant Apple (NASDAQ: AAPL) lost over $220 billion over a few days last month. This came after Fed Chair Jerome Powell stated that inflation was running at its peak. Besides Apple, other leading tech stocks impacted since the Fed Reserve declaration include Microsoft Corporation (NASDAQ: MSFT), and Tesla Inc (NASDAQ: TSLA). Rounding out the group are Amazon.com Inc (NASDAQ: AMZN), Alphabet Inc (NASDAQ: GOOG), Nvidia (NASDAQ: NVDA), and Meta Platforms (NASDAQ: FB). According to another MLIV survey, the US will enter another recession next year.