220330141546 03 Bitcoin Cryptocurrency

Crypto crash and gold sell-off show there’s no place for investors to hide

New York
CNN Business

The spectacular collapse of cryptocurrency exchange FTX, a so-called unicorn startup recently valued at $32 billion, is just the latest bit of 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 a $20,000 level just a week ago. Still, even at $20,000, it was a far cry from the price of just north of $46,000 that bitcoin was trading at on the last day of 2021.

It seems that investors who were hoping that rising 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 hit just like stocks and bonds, proving that there really is no place to hide in a market where worries about interest rate hikes and recession are rampant.

Gold prices have fallen by around 6% this year, and the price of the yellow metal is not far from the lows it hit at the start of the Covid-19 pandemic in early 2020. Gold, like bitcoin, then traded as a kind of safe haven in the latter part of 2020.

So can gold and crypto bounce back? The strength of the US dollar hurt both precious metals and cryptos. Why buy gold or digital assets when the dollar 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 in recent years, but they have continued to outperform many major stock market indexes.

Just look at bitcoin prices since the summer of 2020. They have risen more than 80%… though it has been far from a smooth ride. The Nasdaq, by comparison, is only about 1% higher from July 2020 levels.

“Bitcoin and ethereum have gone straight up and down, but they’ve still gained a lot since mid-2020. Over that longer time horizon, digital assets continue to outperform tech stocks,” said Jeff Dorman, chief investment officer at Arca, a firm that crypto specialize, said.

The crypto crash also led to a massive plunge in the shares of publicly traded companies with ties to bitcoin, such as Coinbase, crypto mining companies Hive (HVBTF) and Riot (RIOT) and bitcoin bank Silvergate (SI).

However, some analysts think that it is a mistake to punish the entire crypto industry for the problems at FTX. The near-collapse of FTX, one of the largest cryptocurrency exchanges, has raised questions about contamination.

“While we recognize that the FTX saga could weigh on the crypto space in the near term, we also believe the sell [Silvergate] shares … reflected significant misunderstandings of the mechanics of the company’s platform,” Mark Palmer, head of digital asset research at BTIG, said in a report.

One venture capitalist who focuses on bitcoin and crypto assets agreed that FTX’s problems will not derail the entire world of digital assets.

“Investors seem unconcerned about the impact of FTX on bitcoin’s future,” said Alyse Killeen, founder and managing partner of the firm Stillmark. To that end, her company recently invested in bitcoin infrastructure firm Hoseki, a company also backed by the parent company of Fidelity.

Killeen added that the decline in bitcoin prices that occurred even before the FTX crash is a sign that cryptocurrencies are not yet a true hedge against inflation and a stronger dollar.

This may eventually change once bitcoin expires. But for now, crypto adoption is still in its infancy. So dollar strength is 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 dollar will weaken significantly anytime soon…even though October inflation figures showed a smaller-than-expected jump in consumer prices. This could lead to the Fed starting to slow its pace of rate hikes.

“In this current environment, monetary policy remains the dominant force,” said Joe Cavatoni, chief market strategist for North America at the World Gold Council. “I will be watching to see what happens to the demand for investments and the price of gold once inflation has settled down to a steady rate.”

Cavatoni said that gold weakness this year is mainly due to a “more tactical response to persistent Fed rate hikes and the rising US dollar” from large institutional investors.

The dollar may have more room to run. This could be more bad news for gold.

“Cash was still king,” said Bob Doll, chief investment officer at Crossmark Global Investments. “The dollar should eventually weaken and that could get gold going again, but it’s hard to call tops and bottoms in currencies.”

“We probably won’t get a dollar weakness on board. This is no time to try to be a hero with gold,” he added.

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