Cryptocurrencies are sometimes hailed as digital gold, a so-called savings paradise that can serve as a hedge against more volatile investments, such as stocks. But that is hardly the case in the market route we are seeing now. It turns out that when the fear of economic uncertainty is real, crypto is nowhere near a good hedge like actual gold or even state-supported currencies.
On May 9, when major stock indices recorded their worst one-day losses since early 2020 (the S&P 500 fell 3.2 percent and the Nasdaq fell 4.3 percent), cryptocurrencies fell even further, with both bitcoin and ethereum falling nearly 10 percent.
“It is now clear that bitcoin is trading in parallel with risk assets, rather than [as] a safe haven, ”said Ipek Ozkardeskaya, an analyst at Swissquote Swissquote, in a report in April. “bitcoin is still not the digital gold, it’s apparently more of a crypto proxy for Nasdaq.”
Since peaking at $ 69,000 in November 2021, bitcoin has lost half of its dollar value and is moving in the same downward direction as equities amid rising inflation, rising interest rates and geopolitical uncertainty stemming from Russia and China.
Gold and other precious metals prove to be much better hedges in times like this. While bitcoin has fallen by 34 percent and by 2022 so far, gold has remained stable at around $ 1,800 per ounce. Wells Fargo analysts predict that gold could reach as high as $ 2,100 per ounce this year.
Even cash is a better asset to hang on to than crypto, despite inflation, thanks to a strong dollar. The US Dollar Index, which measures the value of the US dollar against foreign currencies, has risen 8.3 percent this year.
The Federal Reserve has promised to fight inflation while maintaining a strong economy. The central bank has begun to raise interest rates and plans to reduce the securities portfolio on its balance sheet. Rising interest rates usually mean that investors can get more attractive returns from low-risk investments, such as savings accounts and government-backed bonds, causing them to withdraw from more risky assets, such as stocks and cryptocurrencies.
Occasionally intense divestitures such as the one seen on May 9 are also driven by fears that the Fed’s efforts to tame inflation may end up causing a recession. “Corporate earnings tend to suffer from recessions, and that’s what the stock market is worried about,” said William Huston, chief investment officer at Bay Street Capital Holdings. Assets on May 9th.