Crypto crashes and gold sell-offs show that there is no place for investors to hide

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New York
CNN Business
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The spectacular implosion of cryptocurrency exchange FTX, a so-called unicorn startup that was 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 level of $20,000 just a week ago. Still, even at $20,000, it was a far cry from the price just north of $46,000 that bitcoin was trading at on the last day of 2021.

It turns out that investors who hoped that rising interest rates and higher inflation levels would be good for so-called alternative assets like cryptos and gold have been in for 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 worries about rising interest rates 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, then rallied 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 cryptos. Why buy gold or digital assets when the dollar turns out to be the king of currencies?

Some experts are hopeful 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 outperformed many major stock market indexes.

Just look at bitcoin prices since the summer of 2020. They are up more than 80%…although it has been far from a smooth ride. By comparison, the Nasdaq is only up about 1% from the July 2020 level.

“Bitcoin and ethereum went straight up and down, but they still gained a lot from mid-2020. Over the longer time horizon, digital assets are still outperforming technology stocks,” said Jeff Dorman, chief investment officer at Arca, a firm that specializes in crypto .

The crypto crash has also led to a massive plunge in the shares of listed companies associated with bitcoin, such as coin footcrypto mining companies Hive

(HGBTF)
and Riot

(RIOT)
and the bitcoin bank Silvergate

(SI)
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Some analysts believe that it is a mistake to punish the entire crypto industry because of the problems at FTX. The near-collapse of FTX, one of the largest cryptocurrency exchanges, has raised questions about contagion.

“While we acknowledge that the FTX saga may weigh on the crypto space in the short term, we also believe that the sell-off in [Silvergate] shares … reflected 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 cryptoassets agreed that FTX’s problems will not derail the entire universe of digital assets.

“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 firm recently invested in bitcoin infrastructure firm Hoseki, a firm also backed by parent company Fidelity.

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

That may eventually change as bitcoin matures. But for now, crypto adoption is still in its nascent stages. So dollar strength is still negative for bitcoin.

“Bitcoin is still young. It’s 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 significantly soon … although inflation numbers for October showed a smaller-than-expected jump in consumer prices. That could prompt the Fed to start slowing the 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 as inflation settles at a steady rate.”

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

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

“Cash has still been king,” said Bob Doll, Chief Investment Officer at Crossmark Global Investments. “Eventually the dollar has to weaken and that could get gold going again, but it’s hard to call a top and bottom in currencies.”

“We probably won’t buy into a dollar weakness. This is not the time to try to be a hero with gold,” he added.

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