Swiss bank UBS has advised caution regarding cryptocurrencies, citing a variety of general and sector-specific economic issues.
UBS analysts state that aggressive actions taken by central banks to curb inflation by raising interest rates have significantly dampened growth expectations and investment appetite, particularly affecting areas such as cryptocurrencies, which are highly correlated with volatile technology stocks.
They also noted ‘a significant increase in the correlation between Bitcoin and these stocks over the past year.’
The report emphasizes the turmoil the cryptocurrency sector has witnessed due to specific incidents, such as the failure of the Terra Luna cryptocurrency, which started a series of bankruptcies in the industry.
This included large entities such as Celsius and investment funds such as Three Arrows Capital. Furthermore, in November 2022, FTX, previously the second largest cryptocurrency exchange in the world, and its trading company Alameda, occurred.
The report adds: ‘FTX’s bankruptcy was particularly damaging, given its wide reach within the cryptocurrency network and its previous role in supporting other distressed entities.’
The collapse of FTX and Alameda not only affected their own operations, but also had ramifications for their associated investment companies and products, including $175 million of exposure to Genesis.
The UBS research document also addresses the sharp decline following the collapse of FTX, with a particular focus on the significant implications for Solana (SOL) and the broader venture capital space.
According to the document, ‘Through Alameda, Bankman-Fried made direct investments in selected cryptocurrency projects, one of which was Solana. At the beginning of November, Alameda disclosed SOL holdings worth more than $1 billion, representing an estimated 10% of SOL’s total market capitalization.
This acquisition has become a source of concern as the FTX/Alameda crisis worsens, which has severely damaged Solana’s market position and investor confidence.
The report also addresses concerns about Bitcoin and ‘encapsulated’ Ether in Solana’s network, emphasizing the complexities and risks of cryptocurrencies backed by other tokens, especially when the holding entity faces financial instability.
On the venture capital side, UBS analysis suggests that despite the disruptions caused by the downturn in the cryptocurrency market, the overall share of the venture capital sector in digital assets remains very modest.
However, the report notes that ‘some venture capitalists (VCs) and growth-focused private equity firms have been important investors in digital assets, and the failures of Terra Luna and FTX have raised concerns about potential losses and the viability of these managers.”
In conclusion, the report notes that each cycle of ups and downs in the cryptocurrency market, while difficult, is a key stage in the development of the industry.
“With less competition for funds, more stable valuations, and improved transparency and regulation, we believe digital assets will offer a more favorable investment landscape in the future,” UBS concludes.
This article was produced and translated with the help of artificial intelligence and examined by an editor. For more details, see our Terms and Conditions.
