Over the last year, the strong economy and raging inflation have resulted in a reversal of the bull market in tech, growth, and speculative stocks. We can see the damage of this whether we look at SPACs which are down more than 80% in most cases, EVs, SaaS, cloud computing, or cannabis. Basically, any industry that is priced on future growth gets punished.
And, it's a logical reaction to rates going higher. Assuming that a company worth $1 billion is projected to generate $1 billion in free cash flow over the next decade. The value of this $1 billion is vastly different in a world with low rates and inflation vs a world with high rates and inflation. In this environment, stocks with low valuations, huge capital investments, and pricing power are going to outperform, but very few tech or growth stocks fit the description.
Cryptocurrencies.may be the premier example as it's a new technology with immense growth potential that is also speculative. Over the last decade, the industry's rise has been astonishing, creating trillions in value. However, there remain very open questions about its use case beyond just speculation.
This has led to fears that we may be in the midst of another bear market in cryptocurrencies or as it's been described as "crypto winter". Already, bitcoin's (BTC) price is down 44% from it's all-time high from a few months ago. However, bitcoin is the most liquid cryptocurrency with institutional ownership. If we go down the rabbit hole, we can find that there is much more weakness in terms of alt-coins that have much less stability in terms of ownership and a longer path to use cases. And, then we if we go down to the next tranche with tokens, NFTs, and DAOs. We find even more weakness. Although, the higher-profile ones continue to outperform, there is a significant drop-off in terms of liquidity and transactions.
In the near-term, inflationary pressures and inflation are kind of embedded. So, it's likely that headwinds will remain, and weakness will persist given that price moves are driven by speculation rather than fundamentals.
In the longer-term, this could be the best thing for the health and resilience of the industry. It's similar to what we saw between December 2017 and October 2020 when bitcoin traded between 20,000 and 5,000 following its massive bull run from $400 to $20,000. It allows frothy and hype-fueled assets to go down, while high-quality ones tread water. It's also when the greedy operators more interested in a quick buck, leave the industry for greener pastures, while the true believers and builders remain. Of course, their next challenge is to develop commercial applications that are draw users to crypto beyond just the promise of easy riches.