What Caused the Drop in Tech Stocks and Cryptocurrencies?
Come check out our article to learn more about what caused the recent drop in tech stocks and cryptocurrencies, as well as what investors should do to deal with the situation effectively.
In January and February, tech stocks and cryptocurrencies plummeted, with many household names down more than 40% year to date. So, what was the reason?
Tech Stocks
The tech sell-off started with the US Federal Reserve, the US central bank, announcing increasing interest rates to combat inflation. The first rate hike was expected in March, and analysts predicted between three and seven rate hikes in 2022.
The Fed is increasing interest rates because US dollar inflation has gone up massively, exceeding 6%, which is way higher than the Fed's goal of 2 to 3%. The reasons include supply chain bottlenecks due to lower supply because of pandemic-related factory closures and higher demand because of massive stimulus packages by governments worldwide. Another reason is higher energy prices due to changing climate priorities.
When central banks raise interest rates, companies’ future cash flows are discounted at a higher factor. As stock prices are the present value of a company's future cash flows, higher rates lower prices. Tech stocks, in particular, trade based on future expectations and not so much on current earnings, which is why this sector has been hit particularly hard.
Cryptocurrencies
Why have cryptocurrencies such as Bitcoin been sold off despite the fact that they do not produce future cash flows?
This is because investors view cryptocurrencies as risk assets, meaning they are among the first to be sold off when investors are de-risking their portfolios. Rising rates, the tech stock sell-off, and political unrest in Ukraine have created a risk-off environment, causing investors to run for liquidity. Bitcoin, the leading cryptocurrency, is now more than 40% lower than its all-time high in November 2021.
So What Should Investors Do?
Nathan Meyer Rothschild famously said, "buy when the cannons are firing,” which means to take advantage of lower valuations once markets are in a risk-off mode. Of course, there is a risk to that because you never really know whether we have already seen the bottom or not. Dollar-cost-averaging into the market, meaning investing small sums at a time, is a common approach to deal with situations like these.
Work with Export Portal
At Export Portal, we understand how difficult penetrating new markets can be. That’s why we have collaborated with different experts to keep you informed and updated. Check out our site today and learn more about how we can help you expand your business.
Comments 1