Swiss banking giant UBS recommends staying cautious with cryptocurrencies, citing a range of macroeconomic and specific industry concerns.
Analysts at UBS say that central banks' aggressive measures to combat inflation with higher interest rates severely dented growth expectations and investment appetites, particularly affecting sectors like cryptocurrencies, which are closely tied to high-beta technology stocks.
They also noted "a significant increase in the correlation between Bitcoin and these stocks throughout the year."
The report highlights how the crypto industry faced additional turmoil from 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 such as Three Arrows Capital. Moreover, November 2022 saw the dramatic failure of FTX, once the world’s second largest crypto exchange, along with its sister trading firm Alameda.
“FTX's bankruptcy was particularly damaging, given its widespread influence across the crypto ecosystem and previous role in aiding other struggling firms,” it added.
FTX and Alameda's downfall not only impacted 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 downturn following the FTX collapse, focusing particularly on the severe impact on Solana (SOL) and the broader venture capital landscape.
According to the report, "Through Alameda, Bankman-Fried invested directly in selected crypto projects, one being Solana. At the beginning of November, Alameda revealed a SOL position valued at more than USD 1bn, representing an estimated 10% of total SOL market capitalization."
This investment became problematic as FTX/Alameda's downfall unfolded, severely affecting Solana's market position and investor confidence.
The report also touches on concerns related to "wrapped" Bitcoin and Ether within the Solana ecosystem, highlighting the complexities and risks of cryptocurrencies backed by other tokens, especially when the custodian faces solvency issues.
On the venture capital side, the analysis by UBS points out that while the crypto market downturn caused disruptions, the overall exposure of the venture capital industry to digital assets remains relatively low.
However, the report notes, "Select venture capitalists (VCs) and growth-focused private equity managers have been prominent investors in digital assets, and the collapse of Terra Luna and FTX raised questions about potential losses and manager survival."
Finally, the report advises that each crypto boom-and-bust cycle, while challenging, is a necessary step toward the industry's maturation.
UBS concludes that "with less competition for capital, more realistic valuations, and greater transparency and regulation, we think digital assets will offer a better, investable environment in the future.”