The crypto crash and gold selloff show that there is nowhere for investors to hide


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CNN Business

The spectacular 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 horrible year for crypto before the FTX-Binance soap opera.

Bitcoin prices are currently 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 price north of $46,000 that bitcoin traded on the last day of 2021.

It turns out that investors who hoped 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’ve been hit just like stocks and bonds, showing that there really is nowhere to hide in a market where worries about rising rates and recession reign supreme.

Gold prices have fallen about 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. The Gold, like bitcoin, then surged in the latter part of 2020 as a sort of safe haven trade.

So can gold and crypto make a comeback? The strength of the US dollar has hurt both precious metals and cryptocurrencies. Why buy gold or digital assets when the greenback is proving to be the king of currencies?

Some experts expect the worst could 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 have still outperformed many major stock indexes.

Just look at bitcoin prices since the summer of 2020. They’re up more than 80%… though it’s been far from a smooth ride. The Nasdaq, by way of comparison, is only up 1% from July 2020 levels.

“Bitcoin and ethereum have been up and down, but they’ve still gained a lot since mid-2020. Over this longer time horizon, digital assets continue to outperform tech stocks,” said Jeff Dorman, chief investment officer at ‘Arca, a company specializing in crypto.

The crypto crack has also caused a massive drop in shares of publicly traded companies with ties to bitcoin, including Coinbase, cryptocurrency miners Hive (HVBTF) and Riot (RIOT), and bitcoin bank Silvergate (SI ).

Some analysts think it’s a mistake, however, to castigate the entire crypto industry because of FTX’s problems. 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 sale to [Silvergate] actions … reflect a significant misunderstanding of the mechanics of the company’s platform,” Mark Palmer, head of digital asset research at BTIG, said in a report.

A venture capitalist who focuses on bitcoin and crypto assets agreed that FTX’s problems will not derail the entire digital asset universe.

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

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

This may change over time as bitcoin matures. But for now, crypto adoption is still in its nascent stages. Therefore, dollar strength remains negative for bitcoin.

“Bitcoin is still young. It’s still a new form of currency, payment and store of value,” he 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 substantially any time soon… though October’s inflation numbers showed a smaller jump than expected 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’ll be watching to see what happens to investment demand and the price of gold once inflation settles in at a steady pace.”

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

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

“Cash has still been king,” said Bob Doll, chief investment officer at Crossmark Global Investments. “The dollar should eventually weaken and that could bring gold back, but it’s hard to name the best and the worst in currencies.”

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

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