Technology stocks are one of the sectors that garner the most attention from investors in the US stock market. Since the beginning of 2020, technology stocks have shown remarkable performance, especially amid the Covid-19 pandemic, which has boosted demand for digital products and services. However, will this trend of technology stock increases continue in 2024? What is the role of the Nasdaq as the technology index in the US? And how does it relate to the rapidly growing crypto market? This article will attempt to answer these questions.
The Cycle of US Technology Stock Increases
US technology stocks can be divided into several categories, such as hardware, software, internet, semiconductors, cloud computing, artificial intelligence, and others. Each category has its own growth and decline cycles, depending on factors such as innovation, competition, regulation, and market demand. However, generally, US technology stocks tend to follow cycles of increase and decrease that are related to macroeconomic cycles.
The cycle of US technology stock increases usually occurs when the US economy is growing, consumers and businesses have high confidence, and there are fiscal and monetary stimuli supporting growth. Under these conditions, US technology stocks can provide high returns for investors, as technology companies can increase their revenue, profits, and market share. Additionally, US technology stocks can also benefit from emerging trends in the digital world, such as e-commerce, social media, streaming, gaming, and others.
The cycle of US technology stock declines usually occurs when the US economy is weakening, consumers and businesses have low confidence, and there is political and geopolitical uncertainty disrupting growth. Under these conditions, US technology stocks may experience correction or even crisis, as technology companies face challenges such as declining demand, intense competition, margin pressure, and regulatory changes. Additionally, US technology stocks may also be affected by other specific factors, such as changes in consumer preferences, technological shifts, or corporate scandals.
Based on these cycles of increase and decrease, it can be said that US technology stocks have been in an increasing phase since 2020, triggered by the impact of the Covid-19 pandemic that has driven digital transformation in various sectors. US technology stocks have also been boosted by massive fiscal and monetary stimuli from the US government and central bank, aimed at preventing economic recession. Some US technology stocks even reached all-time highs in 2021, such as Apple, Microsoft, Amazon, Facebook, Alphabet, and Tesla.
However, will this cycle of increase continue in 2024? According to some analysts, US technology stocks still have bright prospects for the coming year, for several reasons, including:
- The US economic growth is expected to remain strong, supported by widespread Covid-19 vaccination, consumption and investment recovery, and additional fiscal stimulus from the Biden administration, focusing on infrastructure, green energy, and innovation.
- US technology companies are expected to continue improving their financial performance, as they have a strong position in the global market, offer quality and innovative products and services, and have high consumer loyalty. Some technology sectors expected to grow rapidly in 2024 are cloud computing, artificial intelligence, internet of things, e-commerce, and streaming.
- Valuations of US technology stocks are expected to remain reasonable, as the earnings growth of US technology companies will align with their stock price growth. Additionally, US technology stocks will remain attractive to investors, as they offer higher returns compared to other low-risk assets, such as bonds or gold.
Of course, there are also some risks that could threaten the cycle of US technology stock increases, such as:
- Rising inflation and US interest rates, which could pressure the valuations of US technology stocks by increasing the cost of capital and reducing the attractiveness of stocks with high future cash flows. Additionally, rising inflation and US interest rates could also trigger monetary policy tightening by the US central bank, which could cause market volatility and disrupt economic growth.
- Increasing competition in the technology sector, both from other US technology companies and from global technology companies, especially from China. This competition could erode market share, margins, and profits of US technology companies, and force them to increase investment and innovation to maintain their positions.
- Regulatory and legal changes that could restrict the activities of US technology companies, especially those related to data privacy, cybersecurity, business competition, and taxes. These changes could increase the operational and legal costs of US technology companies, and reduce their flexibility and efficiency.
The Role of Nasdaq as the Technology Index in the US
Nasdaq is one of the largest stock exchanges in the world and also refers to the stock market index associated with this exchange. Nasdaq was founded in 1971 as the world's first electronic stock exchange, which enabled online stock trading without involving physical exchanges on the trading floor. Nasdaq provides trading in various financial products, including stocks, options, ETFs, and futures. Nasdaq is overseen by the Securities and Exchange Commission (SEC) in the US to ensure that trading on this exchange is transparent and fair.
Nasdaq has several stock market indexes that reflect the performance of companies listed on this exchange, such as the Nasdaq Composite, Nasdaq 100, Nasdaq Biotechnology, and others. However, the most famous and frequently used index is the Nasdaq 100, which consists of 100 large technology companies listed on Nasdaq. This index is designed to track the performance of leading technology companies in the US, operating in various technology sectors, such as information technology, software, internet, semiconductors, cloud computing, artificial intelligence, and others.
Famous companies included in the Nasdaq 100 index include Apple, Microsoft, Amazon, Facebook, Alphabet (Google's parent company), Nvidia, Tesla, and many more. The composition of this index is reviewed periodically to reflect changes in the technology industry. This index is often used as a measure to gauge the overall performance of the technology stock market, as it includes companies with high market capitalization, revenue, profit, and growth. This index is also used as a basis for derivative financial products, such as ETFs, options, and futures.
The role of Nasdaq as the technology index in the US is as follows:
- Providing information and data on the performance, trends, and current issues related to the technology sector in the US, which can be used by investors, analysts, academics, media, and other stakeholders to make fact-based decisions and analysis.
- Providing a platform and infrastructure that enables efficient, fast, and secure trading of technology stocks, using advanced technologies such as electronic trading systems, communication networks, and cybersecurity.
- Providing incentives and facilities for technology companies to list on this exchange, such as low listing fees, flexible listing requirements, and marketing and branding support.
- Providing contributions and social responsibilities to the community and the environment, by supporting initiatives related to education, health, diversity, inclusion, and sustainability.
Relationship Between Technology Stock Increases and Crypto
Crypto or cryptocurrency is a form of digital money that uses cryptography technology to secure transactions, control creation, and verify transfers. Crypto is not issued by central authorities, such as central banks or governments, but is generated by decentralized computer networks, called blockchains. Crypto can be used for various purposes, such as payments, investments, speculation, or store of value. Some of the most popular cryptos in the world are Bitcoin, Ethereum, Ripple, Litecoin, and Binance Coin.
Crypto has experienced rapid growth in recent years, especially in 2021, when the price of Bitcoin reached record highs above $60,000 per coin. Some factors driving the growth of crypto include:
- Increasing adoption of crypto by individuals, companies, and institutions, both as a payment tool, investment asset, or portfolio diversification means. Some significant examples of crypto adoption include Tesla's $1.5 billion Bitcoin purchase, PayPal's crypto integration, and the formation of crypto funds by major financial companies such as BlackRock, Morgan Stanley, and Goldman Sachs.
- Continuous innovation and development in blockchain technology, which enhances the functionality, features, and scalability of crypto. Some examples of these innovations and developments include the launch of Ethereum 2.0, aimed at improving the speed, efficiency, and security of the Ethereum network, and the emergence of various new crypto projects offering solutions to various issues, such as DeFi (decentralized finance), NFT (non-fungible token), and Web 3.0.
- Economic, political, social uncertainty and instability worldwide, which drive demand for alternative assets not dependent on traditional financial systems, such as crypto. Some examples of this uncertainty and instability include the Covid-19 pandemic, geopolitical tensions, debt crises, and inflation.
The relationship between technology stock increases and crypto is as follows:
- The increase in technology stocks and crypto has several common driving factors, such as economic growth, fiscal and monetary stimulus, technological innovation, and digital adoption. Both assets also share similar characteristics, namely high growth potential, high risk, and high volatility.
- The increase in technology stocks and crypto influences each other, both positively and negatively. Positively, the rise in technology stocks can increase interest and confidence in crypto, as it indicates that the technology industry is growing and innovative. Conversely, the rise in crypto can increase interest and confidence in technology stocks, as it shows that the crypto market is growing and maturing. Negatively, the rise in technology stocks can reduce demand for crypto, as they offer higher and more stable returns. Conversely, the rise in crypto can reduce demand for technology stocks, as they offer more attractive and speculative alternatives.
- The increase in technology stocks and crypto has different impacts on the economy and society. Generally, the increase in technology stocks can have a more positive impact, as it can increase productivity, innovation, employment, and prosperity. Conversely, the increase in crypto can have a more negative impact, as it can increase speculation, crime, money laundering, and injustice.
Nasdaq's Increasing Correlation with Crypto
Correlation is a statistical measure that indicates how strong the relationship between two variables is. Correlation ranges from -1 to 1, where -1 means a perfect negative relationship, 0 means no relationship, and 1 means a perfect positive relationship. Correlation can be used to analyze the relationship between various financial assets, such as stocks, bonds, commodities, and crypto.
Nasdaq is a stock market index that reflects the performance of technology companies in the US, while crypto is a form of digital money that uses blockchain technology. These two assets have a fairly complex and dynamic relationship, which can change over time, conditions, and other factors. However, generally, it can be said that Nasdaq is increasingly correlated with crypto, especially with Bitcoin, which is the largest and most popular crypto in the world.
Some evidence that Nasdaq is becoming increasingly correlated with crypto is as follows:
- According to data from Coin Metrics, the correlation between the Nasdaq 100 and Bitcoin increased from 0.22 at the end of 2019 to 0.34 at the end of 2020, indicating that both assets are moving more in sync. This correlation also increased in 2021, reaching 0.41 in March, which is the highest level in history.
- According to data from Skew, the correlation between the Nasdaq 100 and Bitcoin also increased during market crises or uncertainties, such as in March 2020, when the Covid-19 pandemic hit the world, or in January 2021, when there was a change of power in the US. This indicates that both assets are becoming more sensitive to the same macroeconomic factors.
- According to data from TradingView, the correlation between the Nasdaq 100 and Bitcoin also increased during events or news related to the technology or crypto industry, such as in February 2021, when Tesla announced a $1.5 billion Bitcoin purchase, or in March 2021, when Coinbase, the largest crypto exchange in the US, filed for an IPO (initial public offering) on Nasdaq. This indicates that both assets are increasingly influenced by the dynamics of the technology and crypto sectors.
- There is an increasingly close interdependence between the technology industry and crypto, both in terms of demand and supply. On the demand side, many technology companies are beginning to use, provide, or invest in crypto, for operational, strategic, or financial purposes. On the supply side, many crypto companies are starting to use, provide, or collaborate with advanced technologies, such as cloud computing, artificial intelligence, or the internet of things. This makes the performance of technology stocks and crypto mutually influenced by developments and innovations in both industries.
- There are similarities and parallels between the vision and mission of the technology and crypto industries, namely to create a more connected, open, and inclusive world, using technology as a tool to solve problems, improve efficiency, and empower individuals. This makes investors, developers, and users from both industries have similar interests and preferences, and support the development and growth of both industries.
- There is a shift and diversification in the investment portfolios of investors, especially institutional investors, who are beginning to allocate some of their assets to crypto, in addition to technology stocks. This makes technology stocks and crypto more integrated and correlated, as investors tend to adjust their allocation and investment strategies according to market conditions and dynamics.
Examples of Technology Stocks Correlated with Crypto
Some examples of technology stocks correlated with crypto are as follows:
- Nvidia (NVDA):
Nvidia is a technology company engaged in the design and production of graphics chips, used for various applications such as gaming, parallel computing, artificial intelligence, and crypto mining. Nvidia has a positive correlation with crypto, especially Bitcoin, as Nvidia graphics chips are used by many Bitcoin miners to generate and verify Bitcoin transactions. Additionally, Nvidia also has products and services related to crypto, such as GeForce Now, which is a cloud-based gaming platform that supports crypto payments, and CMP (Crypto Mining Processor), which is a specialized chip designed for crypto mining.
- Square (SQ):
Square is a technology company operating in the digital payment and financial services sector, providing various products and services such as Cash App, Square Register, Square Capital, and Square Crypto. Square has a positive correlation with crypto, especially Bitcoin, as Square was one of the first technology companies to adopt and support crypto, both as a payment tool, investment asset, and educational tool. Square also has significant exposure to crypto, having purchased $220 million worth of Bitcoin as part of the company's cash reserves.
- PayPal (PYPL):
PayPal is a technology company operating in the digital payment and financial services sector, providing various products and services such as PayPal, Venmo, Braintree, Xoom, and Paxos. PayPal has a positive correlation with crypto, especially Bitcoin, as PayPal is one of the largest technology companies to integrate crypto into its platform, allowing users to buy, sell, store, and use crypto for various transactions. PayPal also has the potential to increase adoption and demand for crypto, as it has a wide and loyal network and user base.
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