Will weakness in Magnificent 7 stocks spread to Bitcoin price?

Big tech stocks are off to a strong start to 2023 and are facing trillions of dollars in losses, worrying shareholders. Wall Street’s jitters over soaring bond yields and rising interest rates have cast a pall over the companies. Traders are now considering the potential impact on Bitcoin (BTC) if the S&P 500 continues its downward trend.

Therefore, investors must investigate the correlation between Bitcoin and the S&P 500 and consider whether the cryptocurrency can thrive in a high interest rate environment.

The seven largest technology companies – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla – together account for a staggering 29% of the S&P 500, the highest concentration level ever for the stock market index. . However, these tech giants have witnessed substantial growth since the end of July. erosion Its market value lost as much as $1.2 trillion.

James DeBoer on “Real Money” notes “73% of stocks on the market are more than 20% below their highs,” which technically defines a bear market. That underscores growing concerns in the broader economy beyond the seven largest stocks.

To regain credibility in fighting inflation, the Fed has signaled its intention to keep interest rates higher for the long term.Crescat Capital warn A sharp decline in the S&P 500, coupled with widening corporate credit spreads, could increase the likelihood of a recession.

Rising interest rates impact stocks and commodities

Crescat Capital also expressed concern about a wave of corporate and sovereign debt maturing in 2024, which will require refinancing at significantly higher rates. They recommend investing in commodities because of their historical resilience during periods of inflation, exacerbated by challenges faced by commodity producers in fixed asset investment.

Although the market caps of Apple, Microsoft, Google, Meta, Nvidia, and Tesla differ by $10.5 trillion, and the market caps of cryptocurrencies (excluding stablecoins) vary by more than 9 times, there are some interesting similarities.

First, both markets exhibit scarcity relative to the monetary base. In essence, the two reactions are similar to the Fed’s actions. The increase in liquidity is beneficial to scarce assets, while the restrictive policy of high interest rates is beneficial to fixed income investments.

In addition, digital trends have changed the way people use applications and mobile services, especially in the financial services sector. Given the limited adaptability of traditional providers (often due to regulatory constraints), it is not surprising that the public accepts cryptocurrencies (even in the form of stablecoins). The growing demand for fully digital services is a long-term trend that has a positive impact on the cryptocurrency and technology industries.

S&P 500 Decoupling from Cryptocurrencies

Regardless of time frame, the performance of the top seven S&P 500 stocks can be decoupled from cryptocurrencies. Bitcoin is currently trading about 50% below its all-time high, while Apple and Microsoft are down 13% and 7% respectively from their peaks. Part of the reason for this difference is investor concerns about a coming recession or a preference for companies with large reserves, while cryptocurrencies (excluding stablecoins) lack cash flow or earnings.

From an investment perspective, stocks and cryptocurrencies belong to different sectors, but the contrast highlights how Bitcoin can grow independently of retail adoption and spot exchange-traded funds (ETFs), Microstrategy’s $5.4 billion investment in cryptocurrencies Direct investment demonstrates this.

Related: ‘Sodl’ Too Soon: The U.S. Government Didn’t Miss Bitcoin’s Rally Now Totaling $6B

The top seven technology companies hold a combined $596 billion in cash and equivalents, enough to purchase the entire circulating Bitcoin supply assuming 3.7 million Bitcoins are lost forever. Additionally, these companies are expected to generate $650 billion in revenue over the next five years. So even if these companies continue to slide, their cash positions may eventually shift toward commodities, including Bitcoin.

Meanwhile, the U.S. housing market, another savings peak in the economy, is facing its own problems as mortgage rates hit record highs. Sales of previously owned homes fell to their lowest level since October 2010 in September, according to the National Association of Realtors.

Ultimately, a downturn in the S&P 500, whether driven by Big Tech stocks or other factors, may not necessarily spell doom for cryptocurrencies. Investors often seek diversification to reduce risk, and Bitcoin’s low correlation with traditional markets, coupled with early signs of trouble in the real estate sector, provides an attractive proposition for alternative hedges, as legendary investor Stanley As pointed out by Stanley Druckenmiller.