What happened
Shares of Coinbase Global (NASDAQ:COIN) were getting demolished today. The stock was down nearly 12% as of 3:45 p.m. ET on Friday, adding to an absolutely brutal week for it and other companies tied to the crypto market. Along with the crypto exchange, crypto bank Silvergate Capital‘s (NYSE:SI) shares were also in retreat today (down 12%), as were stocks of top Bitcoin (CRYPTO:BTC) holders like MicroStrategy (NASDAQ:MSTR) (down nearly 16%) and Bitcoin fund Grayscale Bitcoin Trust (OTC:GBTC) (down almost 13%).
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So what
The reason for the sell-off is Bitcoin itself. The top cryptocurrency took a more than 10% spill over the last 24 hours. For companies and funds like MicroStrategy that hold sizable Bitcoin positions on their balance sheet, the reason for their stock dropping is pretty straightforward: Lower Bitcoin value means the company is worth less.
Coinbase and Silvergate are a slightly different story, though. Coinbase doesn’t own much Bitcoin directly, and Silvergate is merely a bank that operates a crypto exchange from which institutional investors can send U.S. dollars to clients 24/7 (a key function since crypto exchanges never close).
The worry for Coinbase is thus more about the volume of trading in Bitcoin and related cryptos, since the firm earns a fee every time someone places a trade. And for Silvergate, lower crypto prices could mean lower client funds on deposit for it to earn interest on. Nevertheless, a fall in Bitcoin doesn’t automatically equate to lower revenue or income for either company.
Now what
The nascent crypto industry is prone to some wild swings in value, and thus stocks tied to actual digital currency prices will tend to follow suit. However, the steep sell-off in recent weeks is in tandem with a more widespread correction in high-growth stocks. The Federal Reserve has indicated it’s raising interest rates this year, and richly valued investments are particularly sensitive to rate increases.
There’s no telling when the crash in the crypto market will let up, but if you still like the long-term prospects of companies enabling blockchain technology and its trade, big sell-offs like this tend to be opportune times to nibble and invest more for the long term. Just remember to stay patient and expect plenty more volatility in the weeks ahead.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
