Not yet the beginning of the end for cryptos

Karsten Junius May 27, 2022 09:47

Crypto assets have recently experienced a bumpy ride. Representing roughly 45% of the total market capitalisation in crypto assets, Bitcoin has remained the leader in the crypto space and hence continues to serve as an important market indicator of developments in this market. Earlier this month, Bitcoin revisited the psychologically-important US$30’000 mark for the first time since July 2021. The crypto asset is down 40% year-to-date and almost 60% from its all-time high at US$67,734 in last November. Ethereum – the second-largest crypto asset by market capitalisation – has largely mimicked Bitcoin’s recent moves, along with the large bulk of alternative crypto assets.

Meanwhile, the sell-off in crypto assets has extended to stablecoins. Serving as a medium of exchange between various crypto assets, stablecoins are intended to keep their value stable versus a fiat currency or a real asset. While some of the stablecoins are assets-backed, such as Tether snd USDT, while others use an algorithm to replicate this peg synthetically. Earlier this month, TerraUSD’s synthetic dollar-peg broke down, causing the coin’s value to drop by more than 80%. At the same time, even Tether temporarily lost its peg to the dollar, which has raised general concerns over the so-called stability of stablecoins.

While the current developments need to be monitored closely, we think the breakdown of individual crypto assets or ecosystems essentially represents a healthy self-cleaning process in which the crypto market ultimately further matures. In particular, Bitcoin and Ethereu m have gained in terms of relative market share, while meme coins such as Dogecoin and Shiba Inu have taken a substantial hit. In short, the crypto space currently finds itself in the middle of a consolidation in which lower quality cryptos will gradually drop out of the market.

Lastly, it is important to put the recent drop in crypto prices into perspective and while they may seem huge, it must be acknowledged that several tech stocks have recently experienced even larger drawdowns. Moreover, the commodity space has repeatedly staged extreme price fluctuations, particularly in oil. Comparing the returns for various risk assets on a risk-adjusted basis, we find that the recent drop in the Bitcoin price is by no means extraordinary. Indeed, some equities have been hit harder than crypto assets. This phenomenon underlines that cryptos have held up remarkably well – despite the challenging market environment. Finally, we note that crypto market capitalisation has remained well above its January 2020 levels, reflecting that investor adoption has remained high. Taken together, we conclude that it is still too early to write off cryptos, while they should remain a speculative asset class that will take more time to mature.

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Karsten Junius

Chief Economist, Head Economic Research at Bank J Safra Sarasin