The collapse of cryptocurrencies and the sell-off of gold indicate that investors have nowhere to hide

New York, CNN Business —
The stunning collapse of cryptocurrency exchange FTX—a so-called unicorn startup recently valued as high as $32 billion—is just the latest piece of bad news for investors in Bitcoin, Ethereum, and other digital assets. But even before the FTX and Binance drama unfolded, 2022 had already been a rough year for crypto.

Bitcoin is currently hovering around $16,500, down from $20,000 just a week ago. Even at $20,000, it remains far below its year-end 2021 trading level of just over $46,000.

Investors who hoped that rising interest rates and inflation would benefit alternative assets like crypto and gold have learned a painful lesson this year.

These assets have been hit just like stocks and bonds, proving that in a market dominated by rate hikes and recession fears, there is truly nowhere to hide.

Gold prices have fallen about 6% this year and are now not far above the lows seen at the onset of the COVID-19 pandemic in early 2020. Like Bitcoin, gold surged in the second half of 2020 as a so-called safe-haven trade.

So, can gold and crypto make a comeback? The strength of the U.S. dollar has weighed heavily on both precious metals and digital assets. Now that the dollar has proven itself as the king of currencies, why buy gold or crypto?

Some experts are hopeful that the worst may soon be over for Bitcoin and other cryptocurrencies.

Bitcoin Has a History of Wild Swings
This is not the first time the so-called "crypto winter" has struck. Bitcoin has experienced major price swings in recent years, but its performance still outpaces that of many major stock market indices.

Just look at Bitcoin’s price since the summer of 2020. Despite a bumpy ride, it has risen more than 80%. By comparison, the Nasdaq has only climbed about 1% since July 2020.

“Bitcoin and Ethereum have gone through booms and busts, but they’ve still risen significantly since mid-2020,” said Jeff Dorman, Chief Investment Officer at Arca, a crypto-focused investment firm. “Over the long term, digital assets are still outperforming tech stocks.”

The crypto crash has also dragged down the stock prices of companies tied to Bitcoin, such as Coinbase, crypto miners Hive (HVBTF) and Riot (RIOT), and crypto-friendly bank Silvergate (SI).

Is the Crypto Sector Overreacting?
Still, some analysts believe it’s wrong to punish the entire crypto industry for FTX’s missteps. As one of the largest crypto exchanges, FTX’s near-collapse has sparked fears of contagion.

“While we acknowledge that the FTX event could pressure the crypto space in the near term, we also believe that the sell-off in Silvergate shares... reflects a significant misunderstanding of the company’s platform mechanics,” said Mark Palmer, Head of Digital Asset Research at BTIG, in a report.

A venture capitalist focused on Bitcoin and digital assets agrees that FTX’s troubles won’t destroy the broader digital asset world.

“Investors don’t seem too concerned about FTX’s impact on Bitcoin’s long-term future,” said Alyse Killeen, founder and managing partner of venture capital firm Stillmark. Her firm recently invested in Bitcoin infrastructure company Hoseki, which is also backed by Fidelity’s parent company.

Killeen added that Bitcoin prices had already been falling even before the FTX collapse, suggesting crypto has yet to prove itself as a hedge against inflation and a strong U.S. dollar.

This may eventually change once Bitcoin matures. But for now, the adoption of crypto is still in its early stages. As a result, dollar strength continues to be a headwind for Bitcoin.

“Bitcoin is still young. It’s still a new form of money, payments, and value storage,” she said.