New York
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 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 traded for 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 crypto and gold have had a rude awakening this year.
They have been hit just like stocks and bonds, proving that there really is nowhere to hide in a market where worries about interest rate hikes and recession prevail.
Gold prices have fallen around 6% this year, and the price of the yellow metal is not far from the lowest prices it reached at the beginning of the Covid-19 pandemic in early 2020. Gold, like bitcoin, then rallied in the latter part of 2020 as a kind of safe haven trading.
So can gold and crypto bounce back? The strength of the US dollar has hurt both precious metals and crypto. Why buy gold or digital assets when the dollar turns out to be the king of currencies?
Some experts hope that the worst may soon be over for bitcoin and other cryptocurrencies.
It is not the first time there has been a so-called crypto winter. Bitcoin prices have been notoriously volatile in recent years, but they have still outperformed many major stock market indexes.
Just look at bitcoin prices since the summer of 2020. They’ve risen more than 80%… though it’s been far from a smooth ride. By comparison, the Nasdaq is only up about 1% from July 2020 levels.
“Bitcoin and ethereum went straight up and down, but they still gained a lot from mid-2020. Over the longer time horizon, digital assets still outperform technology stocks,” said Jeff Dorman, chief investment officer at Arca, a firm specializing in crypto.
The crypto crash has also led to a massive drop in the shares of listed companies with ties to bitcoin, such as Coinbase, cryptominers Hive (HVBTF) and Riot (RIOT), and bitcoin bank Silvergate (SI).
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 could weigh on the crypto space in the near term, we also believe the sell-off in [Silvergate] shares … reflected 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 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 firm Hoseki, a company also backed by Fidelity’s parent company.
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 when bitcoin matures. But for now, crypto adoption is still in its nascent stages. So dollar strength remains negative for bitcoin.
“Crypto 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 if the dollar is going to weaken significantly anytime soon … although inflation numbers for October showed a smaller-than-expected jump in consumer prices. This could lead to the Fed starting to reduce the pace of interest rate increases.
“In this current environment, monetary policy remains the dominant force,” said Joe Cavatoni, North America market strategist at the World Gold Council. “I will be watching to see what happens to investment demand and the price of gold as inflation settles down to a steady pace.”
Cavatoni said gold’s weakness this year is primarily due to a “more tactical response to sustained Fed rate hikes and the rising US dollar” by large institutional investors.
The dollar may have more room to run. There could be more bad news for gold.
“Cash has continued to be king,” said Bob Doll, chief investment officer at Crossmark Global Investments. “The dollar will eventually have to weaken and that could get gold moving again, but it’s hard to call currency tops and bottoms.”
“We are not likely to get on board a dollar weakness. This is not the time to try to be a hero with gold, he added.
