Cryptocurrencies Like Bitcoin and Ethereum Can’t Shake the Risk Asset Tag: What’s Holding Them Back – Bitcoin (BTC/USD), Ethereum (ETH/USD)

When cryptocurrencies first began attracting attention from mainstream investors in early 2017, many crypto pundits claimed they could act as an effective hedge against inflation.

Citing the limited token supply of cryptocurrencies Bitcoin BTC/USD As the main reason, a circle of influential crypto investors and enthusiasts believed that this scarcity would drive up cryptocurrency prices even in a high inflation environment.

However, since the 2017 boom that saw bitcoin appreciate by nearly 1900% within a calendar year, the cryptocurrency has displayed extreme price volatility and moved in the opposite direction to the overall inflationary trend.

In fact, bitcoin has been under severe price pressure since rising above the US inflation rate. 4.7% in 2021 to 7.1% in November 2022The fact that cryptocurrencies have not proven to be a safe hedge against rising inflation requires careful analysis.

Correlation with the price trends of equity markets reinforces risk asset status

With high inflation rates often causing a drop in the value of fiat currencies such as the US dollar, investors around the world are always looking for safe havens.

In this sense, precious metals such as gold have been an asset class for both retail and institutional investors, at times preferring the yellow metal’s relatively low price volatility to other riskier asset classes.

Against this backdrop, the hype surrounding cryptocurrencies has theoretically been able to negate the debilitating effects of inflation, while the increase in value attracts hordes of millennial and GenZ investors to this digital asset class. Bitcoin expected to reach $100,000 mark in 2022, with younger generation also bullish on other proven asset classes for cryptocurrencies were walking high,

Instead, the world’s leading cryptocurrency has declined by more than 70% this year, nearly erasing all the gains it had recorded since the onset of COVID-19.

This is similar to the performance of global equity markets as central banks around the world begin to tighten their grip on the global liquidity pipeline.

As interest rates continue to rise, the demand for cryptocurrencies decreases as investors allocate more capital to debt instruments.

In addition, even though countries like el salvador And this central african republic (CAR) has recognized bitcoin as legal currency, has been unable to shake off the entire class of cryptocurrencies. risk asset tag Because they continue to trade with increasing volatility since July 2021.

High price volatility hindering the true potential of crypto

A simple comparison of how gold has performed in the past brings up interesting observations.

The metal is currently trading at prices that are similar to its previous all-time high of ~$1,900 in late 2011.

This is despite prices rising by ~18% since the start of 2020; After adjusting it for inflation, effectively providing negative returns for those who invested in the precious metal a decade ago.

Nevertheless, gold is considered a hedge against inflation, and many countries have large reserves of gold bullion. This leaves us with only one clear reason why bitcoin or Ethereum ETH/USD Has not been able to win the trust of large institutions and governments; Its rampant price volatility has only increased due to the bankruptcies that have plagued the crypto space during 2022.

Read also: Dogecoin mascot Kabosu cheats death, bounces back; Experts share investment strategy for Meme Coin

Big crypto hedge fund failures like three arrows capital (3AC) has only served to underscore the risks of investing in cryptocurrencies, even if it has nothing to do with the safety or security provided by blockchain networks in facilitating global payment networks.

Major Cryptocurrencies Still Years Away From Mass Adoption

According to Chainalysis’ 2022 Global Crypto Adoption Indexdeveloping economies like India, VietnamAnd Brazil rated higher than countries like weThe United KingdomAnd China When it comes to crypto adoption. The ratings are based on a number of parameters, including peer-to-peer (P2P) exchange trade volume, retail centralized service value, and DeFi value achieved compared to purchase price parity (PPP) per capita. The ranking highlights the vast differences seen between major countries when it comes to the use of cryptocurrencies for financial transactions.

Until crypto investors and the community at large are waded through an uncertain and sometimes harsh regulatory environment, investing in cryptocurrencies will attract mixed reactions from the average consumer.

What could devastate cryptocurrency investing is establishing a globally accepted regulatory framework that promotes the use of these newfangled digital assets as trusted stores of value.

In the absence of such a favorable environment, cryptocurrencies may continue to perform in line with underlying macro trends and remain vulnerable to devaluation risks that typically increase during periods of high inflation.

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