The recent stablecoin fiasco has dented investor sentiments and will likely hit the near-term price trajectory of crypto markets. Nonetheless, institutional adoption persists – most notably by global banks – with no sign of a slowdown.
Last week, the now-infamous collapse of top stablecoin TerraUSD triggered a crypto drawdown that saw the digital asset’s market capitalization plummet one-third before rebounding to the current $1.32 trillion, according to crypto data firm CoinMarketCap.
Kwon Do-hyung, more commonly known as Do Kwon, is a South Korean crypto developer that co-founded Singapore-based Terra Labs and co-created the blockchain behind TerraUSD – the third-largest stablecoin before the collapse with a market value of around $18 billion at the time.
Selling pressure for TerraUSD last week caused its dollar peg to break which accelerated the decline of a crypto market that was already facing generally weaker investor sentiments. After peaking at around $3 trillion in November 2021, the overall market capitalization of cryptocurrencies has more than halved.
Persistent Adoption
Interestingly, crypto volatility – the most widely cited reason for not adding material exposure – has not deterred global financial institutions from increasing adoption.
In the midst of the stablecoin turmoil last week, Japan’s Nomura launched its first-ever Bitcoin derivatives offering with a trade executed on the Chicago Metals Exchange.
And just yesterday, the «Financial Times» reported that British hedge fund billionaire Alan Howard’s crypto trading firm Elwood Technologies underwent its first external fundraising round from investors including Barclays as well as Goldman Sachs which had just debuted a Bitcoin-backed lending facility last month.
«If the rate of cryptocurrency adoption continues to follow the adoption of the internet when it first came to prominence, then we could be in the early stages of a 20-year supercycle for blockchain technology, which is likely to have far-reaching effects on various industries,» according to Japanese brokerage giant Daiwa in a research report published last month. «We believe institutional investors can no longer afford to ignore this sector.»
Investor Warning
Despite increased related activities within their businesses, banks remain cautious when advising clients on investing in cryptocurrencies.
«Digital assets have undoubtedly benefited from the low interest rate, high liquidity environment in recent years, with the reversal of the trend likely to remain a strong top-down driver of the asset class going forward,» said Sipho Arntzen, next generation research analyst at Julius Baer, noting that the recent sell-off reinforces the bank’s view that digital assets behave like risk assets more than safe-haven ones.
«While historically correlations between digital assets and equities have been low on average, they tend to spike around risk-off events, often resulting in digital assets falling more than equities, as has been demonstrated recently by markets. For now, headwinds are likely to persist and a quick reversal is unlikely.»
«Contagion here is not via linkages between the crypto ecosystem and the traditional financial system, but via retail investors sentiment,» said Nikolaos Panigirtzoglou, global market strategist at JPMorgan Chase & Co, noting that there could be limited upside ahead due to the recent decline in the share of stablecoins. «If the $1 trillion capital loss in crypto markets causes broad-based retrenchment by retail investors in other risk assets such as equities, then that’s where the spillover is.»
