Cryptocurrency Falls from Gold Show There Is No Safe Option for Investors

The spectacular implosion of cryptocurrency exchange FTX, the 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 cryptocurrencies before the FTX-Binance soap opera.

Bitcoin prices are currently hovering around $16,500, down from the $20,000 level just a week ago. Still, even at $20,000, that was a far cry from the $46,000 price bitcoin was trading on the last day of 2021.

It turns out that investors who had expected rising interest rates and higher levels of inflation to be good for so-called alternative assets such as cryptos and gold have had a rude awakening this year.

They have been hit like stocks and bonds, proving that there really is no place to hide in a market where concerns about rate hikes and recession reign supreme.

Gold prices are down 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, has risen in the latter part of 2020. as a kind of safe harbor trade.

So, can gold and cryptocurrency recover? The strength of the US dollar detracted from both precious metals and cryptos. Why buy gold or digital assets when the dollar is proving to be the king of currencies?

Some experts are hopeful that the worst could be over soon for bitcoin and other cryptocurrencies.

Bitcoin Oscillations

This is not the first time the so-called “crypto winter” has occurred. Bitcoin prices have been notoriously volatile in recent years, but they still fared better than many of the major stock market indices.

Just look at bitcoin prices since the summer of 2020. They have gone up over 80%. The Nasdaq, by way of comparison, is up only about 1% from its July 2020 levels.

“Bitcoin and ethereum went up and down, but they still gained a lot from the mid-2020s. In that longer time horizon, digital assets are still outperforming tech stocks,” said Jeff Dorman, chief investment officer at Arca, a company specializing in cryptocurrencies.

The cryptocurrency crash has also led to a massive drop in shares of publicly traded companies linked to bitcoin, such as Coinbase, cryptocurrency mining companies Hive and Riot, and bitcoin bank Silvergate.

Overreaction in the cryptocurrency sector?

Some analysts think it is a mistake to punish the entire cryptocurrency industry because of the problems at FTX. The near-collapse of FTX, one of the biggest 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 selling the shares [Silvergate] reflected a significant misunderstanding of the mechanics of the company’s platform,” said Mark Palmer, head of digital asset research at BTIG, in a report.

A venture capitalist who focuses on bitcoin and crypto has agreed that FTX’s woes won’t derail the entire digital asset universe.

“Investors don’t seem to be concerned about the impact of FTX on bitcoin’s future,” said Alyse Killeen, founder and managing partner of venture firm Stillmark. To that end, her company recently invested in bitcoin infrastructure company Hoseki, a company that is also backed by Fidelity’s parent company.

Killeen added that the drop in bitcoin prices that was taking place even before the FTX collapse is a sign that cryptocurrencies are still not a true hedge against inflation and a stronger dollar.

This could eventually change when bitcoin matures. But for now, cryptocurrency adoption is still in its early stages. Therefore, the strength of the dollar is still negative for bitcoin.

“Cryptocurrency is still young. It is still a new form of currency, payment and store of value,” she said.

Gold is still not shining

The strength of the mighty dollar has also been a headwind for gold, and it remains unclear whether the dollar will weaken substantially anytime soon, although October’s inflation figures showed a smaller-than-expected jump in consumer prices. That could prompt the Fed to start slowing 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 looking to see what happens to investment demand and the price of gold when inflation settles down to a constant rate.”

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

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

“Cash is still king,” said Bob Doll, chief investment officer at Crossmark Global Investments. “The dollar eventually needs to weaken and that could get gold back up and running, but it’s hard to identify tops and bottoms in currencies.”

“We are not likely to embark on a dollar weakness. This is not the time to try to be a hero with gold,” she added.