Crypto, along with tech stocks, stand out as particularly vulnerable to quantitative tightening, according to a recent survey.
As part of its bid to raise interest rates amid surging inflation, the Federal Reserve started reducing its asset holdings this month by allowing assets to mature without reinvestment, in a process known as quantitative tightening.
Consequently, almost half of the 687 contributors to the latest MLIV Pulse survey, that range from retail investors to market strategists, found tech stocks and crypto to be the most at-risk assets.
In contrast, only 7% considered this to be the case for mortgage-backed bonds, the securities at the center of the 2008-09 financial crisis.
An end to easy money
Crypto and tech stocks both benefited immensely from the COVID-related financial stimulus. Spurred by pandemic-era policy easing, the Nasdaq 100 index soared over 130% from lows in March 2020.
Now that the Fed intends to tighten financial conditions, this could reduce the valuations of tech stocks, which largely rely on optimism about future prospects.
Conventional wisdom posits that a freer flow of funds enables investors greater ease to speculate on digital trends en masse. However, this no longer remains feasible once liquidity begins to be squeezed.
“I don’t think people fully realize how much QE caused investors to add a lot of leverage to their positions,” said Matt Maley, chief market strategist for Miller Tabak + Co. “Now that we’re going through QT, that leverage has to be unwound.”
Increasing crypto correlation
This about-face is also proving to be consequential for cryptocurrencies, which have been showing an increasing correlation with tech stocks, such as bitcoin and the Nasdaq 100 since March 2020.
In April, bitcoin’s 30-day correlation with tech stocks climbed to its highest point since July 2020, while its correlation with the S&P 500 also reached record levels.
Crypto’s strong correlation with tech stocks and negative correlation with burgeoning commodity markets also weakened the argument that they serve as a hedge against inflation. This sentiment was echoed by a pair of Bank of America analysts, who considered bitcoin more of a “risk asset” than an inflation hedge.
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