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Bitcoin is the standout victim of a neck-snapping reordering of the hierarchy in risky assets. Let it burn.
Early on Friday, the libertarian fan token fell to within a whisker of $60,000 a pop, marking a brutal 30 per cent decline so far this year and a 50 per cent decline from its all-time peak in October last year. Despite the hope and enthusiasm that the re-election of Donald Trump provided to the industry, bitcoin itself — the biggest beast in crypto — now stands comfortably below the level it held at the time of that vote.
Driving this decline is the same thing that always drives the price of bitcoin — a pullback in market exuberance in general and in tech in particular. (Clever-sounding rationalisations relating to inflation, demand for havens and a recalibration of the financial system away from proper currencies have always been for the birds.)
This reset in stock markets is a big deal. In the US, the S&P 500 benchmark index has shed nearly 3 per cent from its high of 7,000 earlier this year. That’s a lot in itself but it also masks some serious ructions under the bonnet. To illustrate the point, the tech-rich Nasdaq Composite index, for instance, is down by 6 per cent from its high of this young but eventful year so far.
Sharon Bell, a stocks analyst at Goldman Sachs, described what we are seeing as a “tech wreck”.
It is all a bit odd given that on paper, risky investments, particularly in the US, have never had it so good. Stocks have the backing of a central bank seemingly poised for further interest rate cuts. The One Big Beautiful Bill Act is on track to dish out stimulus in the form of tax rebates to the American public. The US president said recently he expects the stock market to double “in a relatively short period of time”.
The problem here is not that the enthusiasm for AI-related stocks has proven to be the bubble that many feared. Or at least, it has not burst because the technology itself has proven to be a dud. Instead, somewhat ironically, it is the opposite. In some areas, AI simply works too well. Stocks in analytics and software companies have taken the strain this week after the AI company Anthropic launched productivity tools that could, over time, wipe out the need for a lot of what they do.
“Software, data‑services companies, publishers, financial information providers, alternative asset managers and gaming stocks have all sold off sharply on rising fears of AI‑driven disruption,” wrote Bell at Goldman Sachs. So far this year, the software sector is down 16 per cent, she said, while the long-unloved Stoxx Europe 600 index, crammed with nice dull commodity producers, utilities, industrials and financials, is up 4 per cent.
Already, the American exceptionalism model that has dominated investment for decades is stumbling. Scattergun geopolitical and economic policy from the Trump administration is already undermining non-US investors’ habit for keeping US markets at the centre of their portfolios. But the tech reset is something Trump cannot control and cannot chicken out of. Unlike other market pullbacks in the past year, the president cannot click his fingers and make this go away.
Big asset managers have been saying for months that at some point, the market leadership will shift away from the producers, enablers and hyperscalers in AI and towards the companies that will eventually benefit meaningfully from the productivity enhancements this technology promises to provide. What we have seen in markets this week suggests that moment has arrived somewhat earlier than they had imagined.
“Over the last few months, the market has clearly shifted from the ‘every tech stock is a winner’ mindset to something far more brutal: a true winners and losers landscape,” said Deutsche Bank analyst Jim Reid in a note to clients this week. Now, it looks rather like tech is “eating itself”, he added.
The rising tide that Reid describes there has provided a solid underpinning to all kinds of speculative dross in markets in the past couple of years, including crypto.
The staying power of this thing is something to behold, and I would never rule out a recovery as long as enough people remain, inexplicably in my view, wedded to its underlying philosophy.
But now does feel like a moment for a reset of risk tolerance in global markets, and that does not augur well either for token prices or for the already dire performance of companies that buy and store them. One of them, Strategy, reported a $17bn operating loss in its latest quarterly results this week. The stock, which came close to inclusion in the S&P 500 last year, lost a further 17 per cent on Thursday, down some 80 per cent since its peak after Trump’s re-election.
The shock to bitcoin is brutal for those who have placed their life savings in this thing. But the warning signs were there all along, and those who bought it anyway can reasonably be expected to have done so with their eyes open. Theirs is a pool of capital that has been placed in this unproductive belief system for too long.
In this more sober market environment after the “tech wreck”, now is the time for that money to do something more useful in the financial system.
katie.martin@ft.com
