Rock-bottom interest rates created bubbles in speculative long-duration assets. When rates went up, those bubbles started to deflate.
High-risk technology companies are primary examples. With most of their cash flows, if any, in the distant future, their share prices are particularly sensitive to interest rates. Being pandemic winners, many high-risk technology companies had a credible story of very high business growth and disruption of older economic models.
Let’s consider Zoom Video Communications. Its shares rallied by almost 1000% from the beginning of 2020 to the maximum level in October 2020. The peak market cap of Zoom was $162 billion. At that time, Zoom traded at about 60 annual sales and was more expensive than Exxon Mobil, BHP, AstraZeneca, or Lockheed Martin. Zoom’s business grew as much as 54% in 2021 and is expected to increase further by 11% in 2022, but its shares are in a relentless downtrend since October 2020 and have already dropped by about 6 times.
A broader example is ARK Innovation ETF, which includes Tesla, Roku, Zoom, Teladoc Health, Coinbase, and so on. It can be considered a good proxy for high-risk technology companies. After reaching a high in February 2021, ARK Innovation ETF plunged by about 3 times and returned to the levels of April-May 2020.
During the uptrend in 2020, ARK Innovation ETF was a good leading indicator of Bitcoin. Fundamentally, both provide little or no cash flow, represent potentially disruptive new technologies, and are very popular among retail investors. ARK Innovation ETF is about investing based on belief in the general idea of a company regardless of its share price, and that resonates with Bitcoin “believers.” But Bitcoin is far bigger (currently, by about 65 times) and so requires much heavier flows to change its price, which may cause it to move more slowly.
If Bitcoin follows ARK Innovation ETF, it will return to the levels of April-May 2020 and will drop below $10,000.
Should we expand this mid-term bearish view to the long-term prospects of Bitcoin? Probably not, because the tactical cross-asset analysis is not related to long-term trends. Of course, a far lower price of
Bitcoin would indicate a much higher risk of its rejection as a store of value, but history shows many examples of how winning technologies have endured high volatility. Microsoft shares fell by almost 3 times when the dotcom bubble burst, but we still use Windows.
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