Worse and Worser

As we have discussed ad infinitum (or ad nauseam, if you prefer), money has been pouring into tech stocks – particularly the beneficiaries of the copious spending on all things related to artificial intelligence.  While it’s certainly important, and frankly more fun, to focus on the market’s winners, some well-known stocks and other financial instruments have been notable losers in recent days.  Let’s take an unpleasant look at some.

First among them is bitcoin, along with other cryptocurrencies.  I’ve recently been asked several times why bitcoin has been a notable underperformer.  One line of questioning wondered whether bitcoin was failing in its role as an inflation hedge.  My answer was succinct: Was it ever an inflation hedge?  I ran various analyses of bitcoin versus the CPI and other inflation measures and could find no meaningful correlation between them.  That’s OK – the same was true for gold.  Sometimes, gold acts as an “anti-dollar,” while sometimes it’s a vehicle for speculation.  It can also fall during times of crisis if affected people sell their holdings to meet their cash needs.  If that’s true for gold, why shouldn’t that be the case for “digital gold,” especially when it has been subject to various speculative swings throughout its relatively short existence. 

In the past couple of days, crypto bulls received some unpleasant news about some high-profile sales.  Mark Cuban announced that he had sold most of his bitcoin recently, noting, “This might get some people upset: I think Bitcoin has lost the plot… It’s not the hedge that I expected it to be and that was really disappointing.”   The latest leg down was triggered by a small sale by Strategy (MSTR).  The problem was not that there was a seller of 32 coins over the prior week, it was that the sales came from one of the cryptocurrency’s greatest evangelists, a sworn “HODL’er” who last sold in 2022.  The market did not seem to care that the sale was for largely technical reasons – to pay dividends on the company’s preferred stock (STRC) – and instead realized that a persistent low level of bitcoin might indeed require further sales to facilitate those payments.

6-Months, Bitcoin (red/green candles), Ethereum (blue line)

Source: Interactive Brokers

My prevailing theory for crypto’s underperformance, particularly in the larger coins, goes back to a comment that I made in December: “Bitcoin is for normies now.”  This referred to the relative ease for non-crypto-focused investors to gain exposure through ETFs and easy access via a wide range of brokerage firms (such as IBKR).  Crypto became just one more speculative investment for those “normies,” some of whom were nearing retirement age rather than the cohort of younger, earlier adopters.  Like so many other investors, they used these instruments to participate in the crypto runup that occurred before and in the months after the 2025 inauguration but then began to sour on them when they underperformed.  Frankly, if you’re a momentum chaser, why wouldn’t you chase semiconductors or other beneficiaries of AI spending at this point?  Sure, there are reasons to be nervous about those parabolic moves.  Thus, I’m not advocating that everyone dump their poorer performing investments to chase the hottest ones, but it’s clear that some have already done so and continue to do that.

Another sector that has been under pressure of late is listed exchanges.  Their recent swoon has some scratching their heads, and I was asked about it during a media appearance yesterday.  The reason is one that demonstrates how momentum can work in the wrong direction. 

At first glance, the move is perplexing.  Stock, futures, and options volumes have remained robust, with options volumes experiencing a rapid, multi-year advance.  There is nothing on the immediate horizon that indicates a significant crack in those trends.  But the recent disclosure of some firms’ plans to list perpetual futures caught speculators in exchange stocks off-guard.  They fear that the rapid adoption of these contracts, which would not trade on these exchanges, could severely dent the exchanges’ franchises.  Never mind that the initial listings will be limited to cryptocurrencies – a product whose diminished appeal we just discussed – and that there is nothing to preclude exchanges from listing their own similar products, trigger-happy traders sent the shares of publicly traded exchanges sharply lower.  Twitchy, aggressive trading interest is great when you’re already on the right side of the market in question, not so great if you’re caught offsides.

1-Month Normalized Performance, ICE (white), CBOE (blue), NDAQ (red), CME (purple), MIAX (yellow)

Source: Bloomberg

3-Months Normalized Performance, ICE (white), CBOE (blue), NDAQ (red), CME (purple), MIAX (yellow)

Source: Bloomberg