- A crypto “ice age” could be coming as the Fed cuts support for markets and the economy.
- Crypto prices fell, with bitcoin falling to a six-month low below $38,000 on Friday.
- With Fed interest rates rising and regulatory and technology questions lingering, the outlook could be bleak.
Things are cooling down in crypto-land. Bitcoin is down dramatically from its November peak of nearly $69,000, falling to a six-month low below $38,000 on Friday. Trading volumes collapsed.
Some investors fear the market is entering a “crypto winter” – a period where prices fall sharply and do not recover for more than a year – as the
sharply tightens monetary policy.
But it could be worse than that. The crypto could actually be heading into an “ice age,” where prices remain low for years and many investors lose interest, Paul Jackson, global head of asset allocation research, recently told Insider. active at Invesco.
It’s not just Fed policy. Many potential investors have doubts about the robustness of cryptocurrency technology and the regulations that could stifle the development of the industry.
The Fed Could Put Crypto in the Freezer
Early last year, “Bond King” Jeff Gundlach said he believed bitcoin was the “stimulus asset” most boosted by the “torrent” of money from the Fed and the US government during the coronavirus crisis.
The resulting rise in bond yields has already hit unprofitable tech stocks and cryptocurrencies. Both speculative assets look much less attractive when risk-free bond yields are higher.
But more pain is likely as bond yields have risen significantly again, according to Invesco’s Jackson.
“Central banks and governments have played a role in reviving these markets, and as these policies reverse, I think they will have a role to play in depressing them,” he said.
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Even bulls such as Galaxy Digital founder Mike Novogratz said the crypto is likely to remain under pressure.
“I think it could be an ice age,” Jackson said. “I think if you take away those conditions that were created by the Fed…it changes the outlook.”
Nagging questions about regulation and crypto technology
Of course, many cryptocurrency proponents disagree. Dan Morehead, CEO of investment firm Pantera, said in a note last week that the sector should remain strong as uses of crypto networks have soared.
In particular, he pointed to the growth of decentralized finance, or DeFi, where financial activities such as trading can be carried out without the need for intermediaries, thanks to crypto technology.
But many investors are less convinced, with regulation a particular concern. Russia’s central bank, a crypto hub, this week proposed an outright ban on mining and trading, adding to Friday’s selloff. European regulators may be about to toughen their rules, and Spain and the UK is cracking down on crypto ads.
James Malcolm, head of FX strategy at UBS, told Insider that he thinks crypto tech issues could be one of many factors, alongside tighter regulation, that could drag the world of cryptography in another winter.
Malcolm quoted a blog by the founder of messaging app Signal, who concluded that blockchain technology is clunky and far from decentralized. Meanwhile, users of the Ethereum cryptonet have been infuriated by congestion and high transaction fees, which are proving very difficult to resolve.
“A lot of people in the tech space seem to be wondering whether or not [crypto tech] is it effective,” Malcolm said. “It begs the question of whether this was so obviously next-gen tech, then why aren’t there a lot of big tech companies all over the place ? Why isn’t Google investing heavily?