Cryptos, Risk Assets on a Downward Course, Say Research, Investment Analysts

Cryptocurrencies are likely to weaken in value this year on accentuated volatility led by news on tightening regulation and the dollar’s expected rise, driven by the US Federal Reserve’s aggressive policy tightening stance, a Blockhead survey of analysts at research and investment management firms showed on Friday.

Rising inflation, anticipated higher interest rates, and a stronger dollar makes US assets appealing to investors and hurt risk assets, such as stocks and emerging-market assets.

That is likely to limit the interest in cryptocurrencies as these are considered risky assets.

Responses from 15 analysts, polled between April 18 and April 22, showed Bitcoin and Ethereum, the top two cryptocurrencies based on market capitalisation, will fall about 5% and 10%, respectively, by the end of this year from the latest close.

“Cryptos are likely to take a hit this year. While the interest in this asset class is expanding, its risks have also grown exponentially. In addition, these are tumultuous times: The Russia-Ukraine war will likely push back investments in exciting innovation and alternative assets,” said an analyst at a prominent investment firm in the United States.

“Having said that, the scope is broad, and the way forward is promising for cryptocurrencies. The interest in this asset class is evident, with central banks worldwide looking to set up their own digital currencies,” he added.

Bitcoin was forecast to fall to US$40,000 by the end of June, US$39,000 by end-September, and US$38,500 by the end of this year, from around US$40,500 currently.

Forecasts ranged from a low of US$25,000 to a high of US$50,000 for bitcoin by the end of this year. Ethereum was predicted to weaken to US$2,900 by end-June, US$2,800 by end-September, and US$2,700 by the end-December, from around US$2,990 currently. The range of forecasts was US$1,500 to US$5,000 by end-2022.

The survey consensus is based on the median of responses from about 20 analysts. A few provided forecasts in ranges for the end-June, end-September, and end-December periods. While most analysts responded to the complete survey, the poll of the top 10 cryptocurrencies based on market capitalisation did not get enough responses for most, other than Bitcoin and Ethereum.

“Investing in cryptos is risky but can be extremely profitable, as we have seen over the past few years. This year, though, cryptocurrencies will slide as the Russia-Ukraine war will keep investors on edge and likely limit the exposure to digital assets,” said a trade analyst at an alternative investment management firm in Europe.

Increased volatility

That wide range in expectations for both the cryptos points to increased volatility, which most analysts predicted in response to an additional question.

When asked about the primary drivers of cryptocurrencies, most analysts picked news surrounding regulations and the dollar’s strength.

“The Fed is painstakingly making it clear that it wants to tighten policy aggressively, with more policymakers openly talking about larger and faster rate hikes. Hints of a 75-basis-points rate hike at the May meeting are already doing the rounds, and we will not be surprised if that happens,” said a money manager at a large investment management firm in the US.

“There is only one way up for the dollar this year. That puts risk assets outside the US on a downward course, and cryptocurrencies will not be an exception. In the line-up of what is considered risky, cryptos top the list ahead of stocks and emerging-market assets, including Russian assets,” he added.

Interestingly, analysts predicting a rise in cryptos or a fall expected news on regulation to be the primary driver – underscoring the divide in broad views in the market.

“Blimey! Digital assets have taken over the world like a storm. The ever-increasing investor count clearly shows that those governments against such assets will eventually be forced to accept the new reality and give in,” said a chief investment advisor for alternative assets at a money management company in Europe.

“Investors’ queries for these have increased by several-fold in the last year. With many countries legalising and welcoming investments into digital assets’, the demand will only increase,” she added.

While one set of analysts welcomes digital asset regulations and opines such laws would make it legalise these transactions, the others say laws drawing boundaries, increasing paperwork and tracking would limit these transactions and deter investments.

“Like anything new, the risks and questions remain. But one thing that will stop the free-spirited investors in digital assets is regulations,” said an analyst at a trading firm in Europe.

“Governments want to be able to track and manage cryptocurrencies’ transactions, but that will deter crypto investors because most consider digital assets as different and without the hassle of paperwork,” he added.

Analysts, though, suggested cryptocurrencies are gaining traction from the long-term investor community, with several crypto firms working with top exchanges to establish crypto instruments such as derivatives.

Macro headwinds

The Russia-Ukraine war has pushed up commodity prices and, in turn, led to a surge in inflation worldwide.

Global supply chains were already disrupted from the pandemic, and Russia’s invasion of Ukraine late in February has distorted them even further and pushed major central banks to shift their ultra-easy monetary policy toward tightening – to stave off runaway inflation.

Since Russia invaded Ukraine, which Moscow calls a “special operation” and what Western countries and its allies consider the most significant attack on a European state since World War II, the international benchmark, Brent crude, has surged to multi-year highs and has stayed above the $100 per barrel mark.

That has weighed on energy importing countries heavily, with Sri Lanka the prime example – forex reserves have dwindled there and caused the worst economic crisis in the country’s history.

With runaway inflation a reality, the US Federal Reserve is widely expected to lead the way in its fight to tame surging price pressures, with expectations now firming for at least a 50 basis points hike at the May meeting after the central bank lifted interest rates by 25 basis points in March.

That has pushed the dollar to strengthen broadly against most major currencies. Indeed, the dollar index, which measures the greenback’s strength against six of the most traded currencies on the other side of the exchange rate, jumped to two-year highs this week, breaching the 100-level mark.

The yen has been the worst hit, with the dollar/yen pair hitting over a two-decade high on the interest rate differential dynamics.

The survey was conducted by Research Garage, on behalf of Blockhead. Responses were asked to be strictly anonymous and based on a speculative outlook and not forecasting models.