A bear market in Bitcoin may be forming, potentially contributing to the selloff in some highflying stocks—if not the broader market.
Tesla(ticker:Tesla),PayPal Holdings(PYPL), and Square(Square), to name just a few, are trading in tighter correlation to the digital currency. Tesla recentlypurchased$1.5 billion of the digital currency, and said it plans to accept it as payment, fueling a surge in its stock.
High-growth stocks are under pressure due to fears of rising interest rates and bond yields, which reduce the present value of future cash flows. Tesla and the online payment stocks are also crowded trades, making them vulnerable to a selloff.
PayPal Holdingsand Square are becoming digital-currency brokers, enabling consumers to buy and store Bitcoin on their apps, aiming to eventually allow people to use it to make purchases.
The stocks have been sliding as Bitcoin has been in free fall. The digital currency was recently trading around $47,300, down 10% in the past 24 hours and off 18% from highs around $58,000 on Feb. 21, according to CoinDesk.
Falling prices of Bitcoin may be helping to drag down the broaderNasdaq CompositeIndex, which fell 2.5% Monday and was down 2.2% on Tuesday.
The selloff in Bitcoin may have been overdue after its surge over the past few months, and it may have gotten a nudge from Treasury Secretary Janet Yellen. She labeled Bitcoin an “inefficient” currency and warned that it could be a sign of speculative excesses, in aninterviewpublished by the New York Times on Tuesday.
Traders appear to be taking Yellen’s comments as a sign that regulators in the Biden administration may erect more regulatory hurdles to crypto, making it tougher for banks and brokerages to offer commercial services in digital currencies.
TheNasdaq Compositeand other larger-cap indexes may be more closely tied to Bitcoin as the roster of companies involved in crpyto technology or services expands. It now includes the chip manufacturer Nvidia(NVDA), the internet retailer Overstock.com(OSTK), and banks such as Signature Bank(SBNY). Exchanges and brokerages such as CME Group(CME),Cboe Global Markets(CBOE), and Interactive Brokers (IBKR) are also turning into crypto bets as they expand trading in options and futures contracts related to digital currencies.
Tesla’s push into Bitcoin was a vote of confidence in crypto, but it may also have turned Tesla into a proxy for the currency, fueling an exodus from the stock from investors who wanted a car maker, not a crypto play.
“By Musk and Tesla aggressively embracing Bitcoin (from a transactional perspective as well), investors are starting to tie Bitcoin and Tesla at the hip,” wrote Wedbush Securities analyst Dan Ives in a note on Tuesday, referring to Tesla CEO Elon Musk.
Bitcoin’s surge has also done wonders for stocks that were left for dead. Overstock, for instance, surged 850% from $2.50 to $85 over the past year, including a 77% gain this year. The company has built a portfolio of blockchain and crypto-companies under its Medici Ventures division. It now plans to convert that unit into a limited partnership called Pelion Venture Partners Fund.
Overstock was down 10% Tuesday, continuing a slide in the last few days as Bitcoin prices slumped.
Bitcoin’s impact is being felt heavily in PayPal and Square. The companies earn transaction fees on cryptocurrencies, and they appear to be increasing customer engagement and revenue per user, compared with customers who aren’t involved in crypto.
Neither firm makes much profit off Bitcoin so far, and transactions involving the currency make minimal contributions to revenue. Wolfe analyst Darrin Peller estimates that Bitcoin contributes less than 1% to PayPal’s revenue, and slightly more to Square’s.
“It’s not a major driver of revenue, but it’s a helpful tool to get customers more engaged,” he says. “As more people are engaged with the apps, they use their digital wallets more frequently, and more money goes into the ecosystem.”
Indeed, the apps could be conduits for Bitcoin to go mainstream. That, in turn, has fueled excitement about the stocks.
But they are now falling in tandem with Bitcoin. PayPal stock was down 6% Tuesday to $258 and is off 15% in the past five sessions from record highs around $305.
Square, which reports earnings after the close Tuesday, was down 7% to $248, off 9% from its record closing high of $272.75 on Feb. 12.
The total value of Bitcoin remains formidable at nearly $1 trillion. The blockchain technology behind it is being embraced at banks and other financial firms.JPMorgan Chase(JPM)Citigroup(C), andWells Fargo(WFC) have all invested in blockchain. The custody bankBank of New York Mellonrecently announced that it would hold, transfer, and issue crypto for asset-management clients.
More banks are eager to offer crypto services, notedBank of Americain a report on Tuesday, but they are waiting for guidance from Washington. It may be a while before investors see any impact on their income statements, however, especially if the Bitcoin bubble is now bursting.