The cryptocurrency market lost trillions of dollars in 2022, according to a December 18, 2022, article by Forbes. Touted by some as “digital gold,” Bitcoin and other cryptocurrencies have since experienced a tumultuous year that has placed the asset’s heretofore unproven “safe-haven” status into question.
Instability in the cryptocurrency market has led to plunging prices.
The cryptocurrency market began 2022 under pressure from rising interest rates. In May 2022, “stable coin” TerraUSD was unpegged from the dollar, causing the price of the asset and related crypto Luna to plunge to zero. Crypto lender Celsius paused withdrawals, as did cryptocurrency exchange CoinFLEX, and crypto hedge fund Three Arrows Capital fell into liquidation. In the second quarter of 2022, Bitcoin’s price dropped 58% as a result of market volatility.
In November 2022, cryptocurrency exchange FTX Trading Ltd., the world’s second-largest Bitcoin and crypto exchange according to Forbes, faced a liquidity crisis and froze withdrawals. On November 10, 2022, FTX and more than 100 related businesses filed for bankruptcy. The collapse spurred the price of Bitcoin to plunge another 5% by the end of trading Friday, November 11, 2022.
More government scrutiny and oversight is coming to the cryptocurrency market.
On December 16, 2022, the U.S. Treasury’s Financial Stability Oversight Committee issued a report saying that cryptocurrency markets are volatile and filled with fraud. The Committee called for Congress to pass legislation to better regulate cryptocurrencies.
A day earlier, a bill titled the “Digital Asset Anti-Money Laundering Act of 2022” was introduced to the Senate, aimed at reducing money laundering in the cryptocurrency market. Ryan Shea, crypto economist at Trakx, predicts that multiple countries’ governments will introduce more stringent legislation related to the cryptocurrency market.
Many analysts recommend gold as a hedge to historically volatile assets like cryptocurrencies.
On December 12, 2022, analysts from Goldman Sachs released a note wherein they predict gold will outperform Bitcoin, saying the precious metal is the better portfolio diversifier of the two assets. Goldman Sachs pointed to the short-term track record of Bitcoin and the volatility of cryptocurrencies in 2022 and stated that gold was better equipped to deal with tighter financial conditions.
Cryptocurrency’s volatile year and predictions of gold’s long-term strength may lead consumers to reassess which assets they utilize for their portfolio diversification strategies.
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