Crypto crash and gold selloff show there’s no place for investors to hide
The dramatic implosion of cryptocurrency exchange FTX, a so-called unicorn startup that was recently valued at $32 billion, is just the latest bad news for investors in bitcoin, ethereum and other digital assets. . But 2022 was already a terrible year for crypto before the FTX-Binance soap opera.
Bitcoin prices are currently hovering around $16,500, down from $20,000 just a week ago. Yet even at $20,000, that was a far cry from the price just north of $46,000 that bitcoin was trading on the last day of 2021.
It turns out that investors who were hoping that higher interest rates and higher levels of inflation would be good for so-called alternative assets like cryptos and gold have had a rude awakening this year.
They were hit just like stocks and bonds, proving that there really is no place to hide in a market where worries about rate hikes and recession reign supreme.
Gold prices have fallen around 6% this year, and the price of the yellow metal is not far from the lows it reached at the start of the Covid-19 pandemic in early 2020. Gold, like bitcoin, then surged in the latter part of 2020 as a sort of safe-haven trade.
So can gold and crypto rebound? The strength of the US dollar hurt both precious metals and cryptos. Why buy gold or digital assets when the greenback turns out to be the king of currencies?
Some experts hope that the worst may soon be over for bitcoin and other cryptocurrencies.
This is not the first time there has been a so-called crypto winter. Bitcoin prices have been notoriously volatile over the past few years, but they have still done better than many major stock indices.
Just look at bitcoin prices since the summer of 2020. They have risen over 80%…although it has been far from smooth. The Nasdaq, for comparison, was only up about 1% from July 2020 levels.
“Bitcoin and Ethereum have had their ups and downs, but they’ve still gained a lot since mid-2020. Over this longer horizon, digital assets are still outperforming tech stocks,” said Jeff Dorman, chief investment officer at Arca. , a company specializing in cryptography.
The crypto crash also led to a massive drop in the shares of bitcoin-related publicly traded companies, such as Coinbase, crypto mining companies Hive (HVBTF) and Riot (RIOT), and bitcoin bank Silvergate (SI). .
Some analysts believe it is a mistake to punish the entire crypto industry for FTX’s troubles. The near collapse of FTX, one of the largest cryptocurrency exchanges, has raised questions of contagion.
“While we recognize that the FTX saga could weigh on the crypto space in the short term, we also believe that the sell-off in [Silvergate] actions…reflected a significant misunderstanding of the mechanics of the company’s platform,” Mark Palmer, head of digital asset research at BTIG, said in a statement.
A venture capitalist who focuses on bitcoin and crypto assets has agreed that FTX’s troubles will not derail the entire digital asset universe.
“Investors don’t seem to be worried about FTX’s impact on the future of bitcoin,” said Alyse Killeen, founder and managing partner of venture capital firm Stillmark. To that end, his company recently invested in bitcoin infrastructure company Hoseki, a company also backed by Fidelity’s parent company.
Killeen added that the bitcoin price drop that was happening even before the FTX collapse is a sign that cryptocurrencies are not yet a real hedge against inflation and a stronger dollar.
This could possibly change once bitcoin matures. But for now, crypto adoption is still in its infancy. The strength of the dollar is therefore still negative for bitcoin.
“Crypto is still young. It is still a new form of currency, payment and store of value,” she said.
The strength of the mighty dollar has also been a headwind for gold, and it’s not yet clear whether the greenback will weaken materially anytime soon…even though October inflation numbers showed a lower-than-expected consumer price inflation. This could cause the Fed to start slowing its pace of rate hikes.
“In the current environment, monetary policy remains the dominant force,” said Joe Cavatoni, chief market strategist for North America at the World Gold Council. “I will watch what happens to investment demand and the price of gold once inflation stabilizes.”
Cavatoni said gold’s weakness this year is mainly due to a “more tactical response to persistent Fed rate hikes and a surging US dollar” from large institutional investors.
The dollar may have more leeway. This could be bad news for gold.
“Cash has always been king,” said Bob Doll, chief investment officer at Crossmark Global Investments. “The dollar will eventually weaken and that could boost gold, but it’s hard to call currency ups and downs.”
“We are not likely to embark on dollar weakness. Now is not the time to try to be a hero with gold,” he added.