Cryptocurrencies like Bitcoin and Ethereum can’t shake the risk asset tag: what’s holding them back – Bitcoin (BTC/USD), Ethereum (ETH/USD)


When cryptocurrencies first began to gain attention from mainstream investors in early 2017, a number of crypto experts were quick to argue that they could serve as an effective hedge against inflation.

referring to the limited token supply of cryptocurrencies such as Bitcoin BTC/USD as the main reason, a group of influential crypto investors and enthusiasts believed that this shortage would drive up cryptocurrency prices even in the face of high inflation.

However, since the 2017 boom that saw Bitcoin gain nearly 1,900% in a calendar year, cryptocurrencies have shown extreme price volatility and have moved in the opposite direction of the general inflationary trend.

In fact, Bitcoin has been under significant price pressure since the US inflation rate rose from 4.7% in 2021 to 7.1% in November 2022, which explains why cryptocurrencies have not proven to be a reliable hedge against rising inflation. requires careful analysis.

Asset status that activates the risk of correlation with the price trends of stock markets

With high inflation rates causing fiat currencies like the US dollar to erode in value, investors around the world have always looked for a safe haven.

In this sense, precious metals such as gold have been the main asset class for both retail and institutional investors, making the relatively low price volatility of the yellow metal preferable to other risky asset classes during such periods.

Against this backdrop, the hype that cryptocurrencies can theoretically negate the dampening effects of inflation while rising in value has attracted hordes of millennial and generational investors to this digital asset class. Expectations of Bitcoin hitting the $100,000 mark in 2022 were rife as the younger generation even abandoned other proven asset classes for cryptocurrencies.

Instead, the world’s leading cryptocurrency has eroded more than 70% this year, wiping out nearly all of the gains recorded since the onset of COVID-19.

This is very similar to how global equity markets have performed since central banks around the world began to tighten their grip on the global liquidity pipeline.

As interest rates continue to rise, demand for cryptocurrencies decreases as investors allocate more capital to debt instruments.

Additionally, while countries such as El Salvador and the Central African Republic (CAR) recognize Bitcoin as legal tender, the entire class of cryptocurrencies has been unable to escape the risk asset label as they continue to trade with increased volatility as of July 2021. .

High price volatility that inhibits the true potential of crypto

A general comparison of how gold has performed in the past leads to some interesting observations.

The metal is currently trading at prices similar to its all-time high of $1,900 reached in the second half of 2011.

This is despite prices rising ~18% since the start of 2020; effectively producing a negative return for those who invested in the precious metal ten years ago after adjusting the precious metal for inflation.

However, gold is considered a hedge against inflation and many countries continue to hold large reserves of gold bullion. It gives us Bitcoin or Ethereum ETH/USD failed to gain the trust of large institutions and governments; its furious price volatility was only amplified by a series of bankruptcies that marred the cryptocurrency space throughout 2022.

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The failures of major crypto funds such as Three Arrows Capital (3AC) have served to highlight the risks of investing in cryptocurrencies, even if they have nothing to do with the safety or security provided by blockchain networks in facilitating global payment networks.

Leading Cryptocurrencies Are Still Years From Mass Adoption

According to Chainalysis’ 2022 Global Crypto Adoption Index, emerging economies such as India, Vietnamand Brazil is highly valued from countries like USAthe United Kingdomand Demon when it comes to cryptocurrency adoption. The rankings are based on a number of parameters, including peer-to-peer (P2P) exchange trading volume, retail centralized service value, and DeFi value received compared to purchase price parity (PPP) per capita. This ranking highlights the huge disparity between major nations when it comes to the use of cryptocurrencies for financial transactions.

As cryptocurrency investors and society as a whole move through an uncertain and sometimes harsh regulatory environment, investing in cryptocurrencies will draw mixed reactions from the average consumer.

What could put cryptocurrency investment to shame is the creation of a globally accepted regulatory framework that promotes the use of these new-age digital assets as a secure store of value.

In the absence of such a favorable environment, cryptocurrencies may continue to perform in line with the underlying macro trends and remain vulnerable to increased devaluation risks, typically during periods of high inflation.

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