Swiss banking giant UBS recommends caution with cryptocurrencies, citing a number of macroeconomic and industry-specific concerns.
UBS analysts say aggressive measures by central banks to combat inflation with higher interest rates have severely affected growth expectations and investment appetite, particularly affecting sectors such as cryptocurrencies, which are closely linked to High beta tech stocks.
They also noted “a significant increase in the correlation between these stocks throughout the year.”
The report highlights how the crypto industry faced additional turbulence due to specific events, such as the collapse of the Terra Luna stablecoin, which triggered a chain reaction of bankruptcies within the sector.
This included major platforms like Celsius and hedge funds like Three Arrows Capital. Additionally, November 2022 saw the dramatic failure of FTX, once the second-largest crypto exchange in the world, along with its sister trading company Alameda.
“FTX's bankruptcy was particularly damaging, given its widespread influence throughout the crypto ecosystem and its previous role in helping other struggling companies,” he added.
The fall of FTX and Alameda not only affected their direct operations, but also sent shockwaves through related companies and investment vehicles, including a $175 million exposure by Genesis.
The UBS research report also provides a detailed analysis of the dramatic crisis that followed the collapse of FTX, focusing particularly on the severe impact on (SOL) and the broader venture capital landscape.
According to the report, “Through Alameda, Bankman-Fried invested directly in select crypto projects, one of them Solana. In early November, Alameda disclosed a SOL position valued at over $1 billion, representing approximately 10 % of total SOL market capitalization.”
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This investment became problematic as the FTX/Alameda crash unfolded, severely affecting Solana's market position and investor confidence.
The report also addresses concerns related to Bitcoin and Ether being “wrapped” within the Solana ecosystem, highlighting the complexities and risks of cryptocurrencies backed by other tokens, especially when the custodian faces solvency issues.
Regarding venture capital, UBS analysis notes that while the cryptocurrency market crisis caused disruption, the venture capital industry's overall exposure to digital assets remains relatively low.
However, the report notes that “some growth-focused venture capitalists (VCs) and private equity managers have been prominent investors in digital assets, and the collapse of Terra Luna and FTX raised questions about the potential losses and survival of the managers”.
Finally, the report warns that each cryptocurrency boom and bust cycle, while challenging, is a necessary step toward the maturation of the industry.
UBS concludes that “with less competition for capital, more realistic valuations, and greater transparency and regulation, we believe digital assets will offer a better environment for investing in the future.”
