The lifeblood of any speculative market is cheap money, and that lifeline is being cut. Global markets are in a tailspin as expectations for a US Federal Reserve interest rate cut next month are dashed. This change in monetary outlook has acted as a pin to the ballooning asset bubbles in crypto and tech. The result is a $1 trillion wipeout in the cryptocurrency sector, with Bitcoin tumbling to levels not seen since April.
The mechanism of the crash is clear: high interest rates increase the “risk-free” rate of return available from government bonds. When investors can get a solid return without risk, they pull money out of volatile assets like cryptocurrencies and high-growth tech stocks. This capital flight is what has driven Bitcoin down 27% to $91,212. It is also why gold, which pays no yield, has fallen to $4,033 an ounce.
However, the pain is not evenly distributed. The tech sector, particularly companies tied to the AI boom, is looking increasingly vulnerable. With borrowing costs remaining high, the massive capital expenditures required for AI data centers are becoming more expensive to finance. This adds credence to the warnings from JP Morgan and Klarna executives that the sector is overdue for a correction. A “higher for longer” rate environment demands profitability now, not promises of future revolution.
The sell-off is global. Asian markets led the decline with the Nikkei 225 dropping over 3%, followed by losses in Europe and the US. The synchronized nature of the drop indicates that this is a macroeconomic reset. Investors are repricing every asset class based on a future where capital is no longer free and easy.
For the bulls, the hope lies in a pivot later in the year. Analysts at UBS still see the Fed cutting rates eventually, which they believe will help gold and risk assets recover. But until that pivot actually happens, the market remains exposed to the cold winds of tight monetary policy, leaving overvalued sectors like AI and crypto in a precarious position.
