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Why Square, Coinbase, and Canaan All Dropped Along With Cryptocurrencies on Friday

What happened

Shares of stocks with exposure to the crypto market are falling today as crypto prices come down sharply. Canaan (NASDAQ: CAN) was hit hardest and was down as much as 23.4% in early trading, while Square (NYSE: SQ) fell 3.3% and Coinbase (NASDAQ: COIN) was off 3.5%. The stocks are down 19.1%, 2.3%, and 1.8%, respectively, at noon EST.

Cryptocurrency prices are down across the board, and that's having a big impact on stocks today. According to Coinbase, the crypto market is down 4.7% in the last 24 hours, with Bitcoin down 4.5%, Ethereum down 6.8%, and Binance Coin down 7.1% as of this writing.

Image source: Getty Images.

So what

The underlying price of cryptocurrencies will ultimately drive demand for crypto-related equipment, which is why investors are seeing Canaan as the biggest loser following today's move. The company recently reported a great second quarter, with revenue up 507.3% to $167.5 million and net income of $37.9 million. But momentum could fade if crypto prices fall and miners don't value the company's hardware as highly.

As trading platforms, Square and Coinbase will have an indirect impact from any change in crypto prices. Coinbase charges transaction fees, while Square is more of a market maker, buying and selling its own Bitcoin and making money on the spread between those transactions. In either case, higher crypto prices should generally mean more revenue and higher profits, which is why investors don't like seeing crypto prices fall.

There have been a few regulatory concerns for crypto stock investors this week, as well, including news that President Biden is expected to nominate Saule Omarova to run the Office of the Comptroller of the Currency. Omarova has been a critic of both big banks and cryptocurrency, so this could add regulatory pressure in the U.S., which has slowly chipped away at crypto on regulatory and tax fronts this year.

Now what

The week started with a market panic over the feared collapse of China Evergrande Group, one of the biggest property developers in China. This didn't directly impact cryptocurrencies themselves, but it dropped as much as double digits and, as expected, crypto stocks fell with it.

Trading in the second half of the week has been volatile, but not particularly news-driven, for better or worse. In the past week, Bitcoin has fallen 12.1%, Ethereum is down 19.1%, and Binance Coin is down 17.9%. Clearly, momentum trades pushed crypto lower across the board.

What investors have to contend with now is the very real threat that cryptocurrency will see more regulation in the U.S., similar to trends we've seen in China and around the world. We don't yet know what that will look like, but the idea that central governments will regulate the decentralized cryptocurrency industry isn't welcome news for the crypto world.

As a result, some investors are jumping ship this week, pushing almost all crypto-related assets lower.

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Travis Hoium owns shares of Square. The Motley Fool owns shares of and recommends Bitcoin, Ethereum, and Square. The Motley Fool has a disclosure policy.


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