The cryptocurrency crash and gold selloff show that investors have nowhere to hide

New York
CNN Business

The spectacular implosion of the so-called unicorn startup cryptocurrency exchange FTX, which was recently valued at $32 billion, is 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 around $16,500, down from $20,000 just a week ago. Still, even at $20,000, it was a far cry from the north of $46,000 bitcoin traded at on the last day of 2021.

It turns out that investors hoping that rising interest rates and higher inflation would be good for so-called alternative assets like cryptocurrencies and gold have been in for a rude awakening this year.

They hit like stocks and bonds, proving that there really is nowhere to hide in a market dominated by concerns about rising interest rates and recessionary dominance.

Gold prices are down about 6% this year, and the yellow metal is not far from the lows it hit in early 2020 at the start of the Covid-19 pandemic. Gold, like bitcoin, then rose in the second half of the year. 2020 as a kind of safe harbor trade.

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

Some experts hope the worst is over soon for bitcoin and other cryptocurrencies.

This is not the first so-called crypto winter. Bitcoin prices have been unusually volatile over the past few years, but they have still outperformed many major stock market indices.

Just look at bitcoin prices since the summer of 2020. They’re up over 80%…even though that’s a long way from going. By comparison, the Nasdaq is about 1% above July 2020 levels.

“Bitcoin and ethereum have risen flat, but have still gained a lot since mid-2020. Over that long time horizon, digital assets are still outperforming tech stocks,” said Jeff Dorman, chief investment officer at crypto firm Arca.

The cryptocurrency crash has also caused massive falls in shares of publicly traded companies with ties to bitcoin, such as Coinbase, cryptocurrency companies Hive ( HVBTF ) and Riot ( RIOT ), and bitcoin bank Silvergate ( SI ).

Some analysts think it’s a mistake to punish the entire cryptocurrency industry for 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 impact the cryptocurrency space in the near term, we also believe in selling. [Silvergate] shares…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.

One venture capitalist who focuses on bitcoin and crypto assets agreed that FTX’s problems won’t disrupt the entire digital asset universe.

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

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

This may change as bitcoin matures. However, the adoption of cryptocurrencies 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.”

The strength of the strong dollar has also been a headwind against gold, and it’s not yet clear that the dollar will weaken significantly anytime soon…although October’s inflation numbers showed a smaller-than-expected jump in consumer prices. That could start to slow the pace of Fed rate hikes.

“Monetary policy remains the dominant force in this current environment,” said Joe Cavatoni, chief market strategist for North America at the World Gold Council. “Once inflation settles at a steady pace, I’ll be looking to see what happens to investment demand and the price of gold.”

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

There may be more room for the dollar to move. This could be more bad news for gold.

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

“We are not likely to withstand the weakness of the dollar. This is not the time to try to be a hero with gold.”

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