Winter of Discontent

Alternative investments such as cryptocurrencies are expected to undergo another cold winter amid US tapering and tightening regulation though some analysts believe greenback-pegged stablecoins may escape the chill amid bullish forecasts for the US dollar.

They also say the market for non-fungible tokens, NFTs, which are traded with Ethereum, may collapse as the end of the US Federal Reserve’s bond-buying program will hit “new and untested asset classes” the hardest.

Bitcoin tumbled more than 40 percent in January from its November record high of US$69,000 (HK$538,200), though it has rebounded this month. Meanwhile, Ethereum also fell about 40 percent from its November high over the same period.

Bank of America warns in the latest report that investors should not look at bitcoin as an inflation hedge as its correlation with gold is near zero. Instead, bitcoin should be seen as more of a risk asset now.

This came after UBS in its January report forecast a “crypto winter” amid expectations of Fed interest rate hikes.

The last such winter saw bitcoin, from an unprecedented boom to US$20,000 in late 2017, tumble to below US$3,000 a year later when mainstream financial investors believed the bubble had burst.

Patrick Chiu, chief executive and founder of AP Capital, says the target bottom price for bitcoin could be as low as US$25,000 this year, as liquidity dries up.

But unlike previous years, it will not be a prolonged winter as institutions are still allocating to crypto-assets, Chiu added.

Anli Securities chief Andrew Wong Wai-hong expects bitcoin to trade between US$25,000 and US$50,000 this year, adding that there will be increasing alignment between bitcoin prices and tech stock performances.

Amid expectations of a bullish US dollar, some investors have been eying greenback-pegged stablecoins but analysts warn them of regulatory risks, point out to US treasury official Nellie Liang’s comments that technology companies which aren’t licensed like banks should not offer crypto stablecoins.

However, Angus Lo, co-founder of the cryptocurrency trading platform, says some new investors have turned to stablecoins such as USDC, a cryptocurrency pegged to the US dollar.

UBS, however, believes high-flying stablecoins and decentralized finance or DeFi projects will almost surely face bigger setbacks from authorities over the coming months.

Another headwind for crypto assets is the increasing cases of theft, which may also bring about more scrutiny.

The US seized about US$3.6 billion in bitcoin stolen during a 2016 hack of the Bitfinex currency exchange – the largest financial seizure ever.

This came after DeFi platform Wormhole saw an attacker exploit a security flaw to make off with close to US$325 million earlier this month.

Governments, meanwhile, are turning the screws on the crypto trade. Hong Kong intends to impose a licensing system for crypto exchanges and will ban any promotions by non-licensed virtual asset exchanges, Secretary for Financial Services and the Treasury Christopher Hui Ching-yu revealed last week without specifying what virtual assets will be allowed to trade.

And Singapore’s Monetary Authority has banned cryptocurrency traders from promoting their services to the general public, as part of a bid to shield retail investors from potential risks.

This came after investments in the cryptocurrency and blockchain sector in Singapore jumped tenfold to US$1.48 billion last year, according to a KPMG report.

CoinUnited’s Lo says Hong Kong’s planned regulation is understandable and welcomed, but its impact will depend on the details of the rules and when they go into effect.

Meanwhile, governments around the world are rolling out their own central bank digital currencies, with the International Monetary Fund estimating that 100 countries are now looking at CBDCs.

Hong Kong and Singapore launched wholesale CBDCs last year while, China, which has banned crypto, aims to standardize the infrastructure of its digital yuan, the e-CNY, by 2025, four government agencies including its central bank and the securities watchdog announced last week.

China piloted its CBDC last November and has rolled out digital yuan payment services at the Beijing Winter Olympics, which is currently underway.

IMF managing director Kristalina Georgieva says CBDCs will be safer, compared to “unbacked crypto assets that are inherently volatile.”

But Ample Capital’s portfolio manager Mila Yuen Ching-Yiu believes CBDCs won’t decrease the number of crypto investors, since they will be used mainly for daily expenses while people buy bitcoin for investments.

Meanwhile, El Salvador has rejected the IMF’s recommendation to drop bitcoin as legal tender although the country’s bitcoin experiment has led to large-scale protests amid fears over its volatility.

NFT collapse?

Professors from the Institute for Management Development Patrick Reinmoeller and Karl Schmedders argue a crash for NFTs will come as US tapering will punish alternative asset classes harder. Under NFTs, art and collectibles are tokenized, which are secured under the Ethereum blockchain.

They believe the volatility of the cryptocurrencies underpinning the NFT market and the psychology of buying luxury goods will put downward pressure on NFT prices and lead to a large, permanent decline.

CoinUnited’s Lo, however, points out that the drop in crypto prices will encourage more NFT trading.

The booming NFT marketplace OpenSea saw monthly sales hit a record US$5 billion in January when cryptocurrencies fell sharply in the month, according to data from Dune Analytics.

However, the NFT marketplace Cent, which sold the NFT of Jack Dorsey’s first tweet for US$2.9 million, has temporarily halted transactions as there were “rampant” sales of fake and plagiarized tokens.

Analysts are cautious about other alternative coins despite the fact that dogecoin, a cryptocurrency that started as a joke, has been gaining more traction after Tesla chief executive Elon Musk said in early January that the electric carmaker is accepting dogecoin for some of its merchandise.

Meanwhile, more mainstream financial institutions are joining the crypto bandwagon although they do not necessarily hold an optimistic view.

JP Morgan’s head Jamie Dimon, a longtime bitcoin skeptic, had said the top crypto is “worthless” in October last year, but there were reports last August that the US bank had started giving its wealthy clients access to six crypto funds.

Also, UBS, Goldman Sachs, and Morgan Stanley were all reported to be preparing to offer digital currency investments to their affluent clients last year.

But perhaps Greg Bassuk’s take on alternative assets sums up what some investors feel amid the gloom: The chief executive of AXS Investments, says bitcoin should comprise a portion of an investor’s portfolio and that digital assets will be treated longer-term like commodities, equities, bonds, real estate, and other more traditional asset classes “in the years to come.”

This article was taken from the The Standard Hong Kong website.

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