It’s a bear market in bitcoin and tech shares – but crypto carries the biggest risk

The important thing is to distinguish between companies that have solid demand for their products, notably Apple and Microsoft, and those that are mainly hype, writes Hamish McRae

The higher the inflation numbers, the weaker the response in crypto share prices (AP)

Own any bitcoin? If you do, you may be feeling a little richer now than you felt on Monday, but a whole heap poorer than you were at the beginning of the year. Bitcoin is just one extreme example of the vicious bear market in cryptocurrencies and high-tech stocks that have been running since November last year, and has gathered pace in the past few days.

Bitcoin is trading around $32,000, having dipped briefly below $30,000 in overnight trading on Monday night. That leaves it down by more than half its peak of nearly $68,000 in November, and down nearly one-third this year. But that is not extreme. The second most valuable crypto, Ethereum, had a rather good day yesterday – but is also down by one third on the year.

Similar declines are evident almost across the entire range of the high-tech giants of America. Uber is down 45 per cent so far this year, Facebook (or Meta Platforms as we now have to call it) down 42 per cent, Amazon 35 per cent, Tesla 34 per cent, and Google (now called Alphabet) is down 22 per cent.

Even Apple is down 16 per cent. Remember how it was the most valuable company in the world, worth $3 trillion in early January? Well it is still the most valuable, but it is worth only $2.5 trillion now. CNBC calculated that the tech giants lost more than $1 trillion in value in just three days last week. Add in the other losses, including those in the cryptocurrencies, and the bubble has truly burst.

Now you can make an argument that this is a good time to buy, the “buy on the dip” principle, and on a long view, assuming you spread your risk, that may well be right. But there is no argument about the destruction of value that has taken place. People are poorer than they were, or at least thought they were, a few months ago. This has economic consequences.

For a start, there will be some investors who are “under water”, in the sense that the current value of their holdings is less than they paid for them. That depends on timing as well as stock selection. If you bought a year or more earlier, you are probably still ahead. If you bought in the last six months you are probably down. Glassnode, the online market intelligence company based in Zurich, reckons that 40 per cent of investors in cryptocurrencies could indeed be under water.

Does this destruction of value matter? Maybe there was no real value in the first place. If someone has borrowed money to buy their bitcoin, then that is very bad news for them personally. I am worried that inexperienced investors have been sucked into buying cryptocurrencies on the lure that they are an inflation hedge, when so far at least quite the reverse seems to have happened.

The higher the inflation numbers, the weaker the response in crypto share prices. But while individual investors are damaged, unless their losses are so big as to threaten the integrity of the banking system, then there is no generalised disaster. There are, however, knock-on effects from the change of market mood, and that will be something to watch for in the coming weeks.

There are some practical issues for high-tech companies that have relied on share options to attract people. In a booming market, that is seductive, but once share prices start falling, options become less valuable for existing employees, and for new workers maybe valueless. So, to attract people, base salaries have to be bumped up. This increases costs and at the margin at least, depresses earnings – which in turn undermines the share price.

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The bigger issue will be the macro-economic impact. Even if the wealth was never really there, the fact that people will feel poorer will start to have an impact on other asset prices. You would look for the effect in San Francisco house prices and similar assets, and there are early signs of weakness there. However, it is impossible to distinguish what is a general shift of mood in response to higher mortgage costs and what is a tech-related reaction. My guess is that house prices will be more determined by demand for labour in the high-tech centres than by movements in share prices, but that is only a guess.

So what else to look for? All bear markets have a natural lifespan. Their average duration is 9.6 month, so if this is a typical one and you take the peak as last November, high-tech stocks should be looking for a bottom in the late summer or early autumn.

For wider shares, this is not yet a bear market, as the S&P 500 index is not down by 20 per cent. The FTSE100 also is not down there either. You can take that either positively or negatively, though I am inclined to take the most positive view that UK-based companies at least offer reasonable value for investors. The important thing is to distinguish between companies that have solid demand for their products, notably Apple and Microsoft, and those that are mainly hype.

And bitcoin? Well, I agree with Agustin Carstens, head of the Bank for International Settlements in Basel, when he said that bitcoin was “a combination of a bubble, a Ponzi scheme and an environmental disaster”. But that was back in February 2018, so more than four years ago, when bitcoin was trading around $10,000. If you had bought then you would still be ahead today, despite everything. But the big test is ahead, and I think he will be right in the end.