What should investors do?
Should investors hold onto their crypto? Digital currencies may have a significant role in the future of online payments, but so far the case for their investment as a stock market and inflation hedge has failed to be more than a theory.
Bitcoin’s fall this year has shown that other investors view it as a highly speculative and risky investment. As interest rates climb and traditional stocks fall, investors have instead turned to more defensive areas of the market, such as infrastructure and healthcare.
The Financial Conduct Authority, the City regulator, has also warned that people buying Bitcoin did not understand it and it was extremely risky, and prices could fall to zero. The body does not regulate most crypto assets, and so the Financial Services Compensation Scheme cannot protect investors if a crypto platform or exchange goes out of business
Marcus Sotiriou of the digital broker Global Block, said: “Investors are clearly concerned about the aggressive interest rate increases by the US central bank, the Federal Reserve. The bank is also unwinding ‘quantitative easing’ which is removing lots of cheap money from the market.”
The drying up of “easy money” has also disrupted markets that rely on cryptocurrencies, such as “non-fungible tokens”, or NFTs. These are digital certificates that denote ownership of physical or virtual assets stored on the block chain a digital ledger. They are bought and sold using cryptocurrency – but trade volumes are down 82pc from its peak in September, according to data from the analytics provider Non Fungible.
Bitcoin and other cryptocurrencies have failed to protect investors from falls in the wider stock market this year, despite claims the digital assets can act as a safe haven during volatile periods.
The world’s most popular cryptocurrency has dropped 29pc to $32,929 (£26,600) since the start of the year, failing to live up to its status as a “digital gold”.
Fans argue that it can act as a “hedge” against rising inflation and choppy markets, because like physical gold, it is scarce commodity with only 21 million Bitcoins created. This scarcity means over-supply cannot force the price to come down.
However, despite inflation surging to hit 7pc in the UK in March, and the global stock market tumbling, Bitcoin has fallen to levels not seen since July 2021. Other popular cryptocurrencies such as Ethereum and Solana have also slumped, down 37pc and 59pc respectively. Meanwhile, physical gold has rallied 3pc to $1,863 (£1,504).
What should investors do?