The Signal: Rates Standoff

The Market Signal

What’s driving volatility?

A widely accepted structural catalyst for why large technology stocks and cryptocurrencies declined in dramatic fashion last month (putting aside the current Russia/Ukraine standoff) was the understanding that the Federal Reserve would be raising interest rates for the first time since 2018. 

The market consensus is that the Federal Reserve will raise interest rates by 25bps (0.25%) at its next meeting in March, according to the CME Fedwatch tool, with a smaller likelihood (but one nonetheless) that the central bank could be more aggressive and raise rates 0.5%. Some on Wall Street, like Goldman Sachs, now expect the Fed to raise rates 7 times in 2022 (for a total of 1.75%) in response to the latest official inflation figures that showed the highest readings in 40 years.

What do interest rates have to do with crypto and stock prices? 

Interest rates are a major factor in valuing nearly everything, from stocks to your mortgage. In simple terms, rising rates make typically riskier assets less attractive to investors on a relative basis, as the rate of return and yield in your “risk-free” checking account or on treasury bonds rise in tandem.   

As a result, the Nasdaq Index, which is often used as a proxy to describe how technology stocks are performing, declined more than 10% at one point this year, while some individual cryptocurrencies at one point were down 40% from their peak, according to data from TheTie.

The Data Signal

Some stocks dropped more than crypto

That’s not to say stocks were better or worse during the January selloff. Both stocks and equities have bounced since. But some stocks may warrant special attention. Take for example, stocks that are exposed to bitcoin, be it cryptocurrency miners like Marathon Digital and Hut 8 Mining, or bitcoin-exposed companies like Microstrategy. Each of these fell by more than 40% from the beginning of 2022 to their trough in late January. View Performance (only available in-app on iOS)

Is this volatility the beginning of a crypto winter? What are some numbers?

The long and short of it is that it’s unlikely, if history is a guide. 

To be clear, bear markets, where the price for an asset has declined more than 20%, happen – in both stocks and in crypto. 

In fact, Bitcoin has endured more than 4 bear markets in its infancy as an asset class and prevailed. Interest in the largest cryptocurrency also surged to the highest in months, according to Google trends data, just as the currency hit its January lows. This increased interest neatly overlaps with the bounce in prices since. 

If you were participating in any of DM Advisors’ strategies containing crypto, you may have noticed this rebound.

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Coinciding with the rebound were growing numbers of individual holders of cryptocurrency. Owners of more than 0.1 Ethereum (ETH)* (the second-largest cryptocurrency by value) hit an all-time high last week, according to Glassnode data. In a similar vein, owners of more than 0.1 Bitcoin (BTC)* hit an all-time high just this past Wednesday. Also Wednesday, the number of non-zero addresses in Ethereum reached an all-time high – indications of broadening adoption in the crypto segment. 

For now, you can use Domain Money’s proprietary tools** to measure social sentiment, which, for Ethereum, leans neutral, with 39% of mentions being positive, 47% neutral, and the remainder, 14%, negative. The Trading Indicator, another tool at your disposal, is also worth evaluating for the ratings it provides, which encapsulate data beyond just social sentiment. You can view key indicators in the app in the asset detail screen by selecting an asset from the home feed. 


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** These measurements were generated by Domain Money Social Sentiment Signal on 2/17/2022 and they fluctuate continuously in response to the various contributing data points and trends. Domain Money Signals are tools that aggregate information related to market sentiment and should not be relied on for investment decisions.  More detailed information about Domain Money Signal is available at https://help.domainmoney.com/en/?q=signal

* Domain Money Advisors, LLC, an investment advisor registered with the U.S. Securities and Exchange Commission and an affiliate of Domain Money, is currently recommending the following assets contained in this edition of Domain Money’s The Signal as part of Managed Strategies:  ETH, BTC