- A crypto- “ice age” may come when the Fed reduces support to markets and the economy.
- Crypto prices have fallen, with bitcoin falling to a six-month low below $ 38,000 on Friday.
- With the Fed raising interest rates and nagging questions about regulation and technology, the outlook could be bleak.
Things are getting cold in crypto countries. Bitcoin is dramatically down from its peak in November at close to $ 69,000, and fell to a six-month low below $ 38,000 on Friday. Trading volumes have fallen.
Some investors are worried that the market will enter a “crypto winter”[ads1]; – a period in which prices fall sharply and fail to recover in more than a year – as the Federal Reserve abruptly tightens monetary policy.
But it can be worse than that. Crypto may actually be heading for an “ice age”, where prices remain low for years and many investors lose interest, Paul Jackson, Invesco’s global head of asset allocation research, told Insider recently.
It’s not just the Fed’s policy. Many potential investors have little doubt about the robustness of cryptocurrency technology, and regulation that can stifle industrial development.
The Fed can put crypto in the freezer
Early last year, “Bond King” Jeff Gundlach said he believed bitcoin was the “stimulus” that was strengthened most by the “torrent” of money from the Fed and US authorities during the coronavirus crisis.
But less than a year later, the Fed shuts down when it tackles soaring inflation. The markets now expect four interest rate increases in 2022.
The resulting jump in bond yields has already beaten unprofitable technology stocks and cryptocurrencies. The two speculative assets look much less attractive when the return on risk-free bonds is higher.
But more pain is likely, as bond yields have risen significantly further, according to Invesco’s Jackson.
“Central banks and governments have played a role in jacking up these markets, and when these guidelines are reversed, I think they will play a role in depressing them,” he said.
Read more: A 21-year veteran trader breaks down an options trade designed to help investors “maintain risk long enough to see the light of profitability” – and explains why bitcoin can continue to move in line with technology stocks
Even bulls like Galaxy Digital founder Mike Novogratz have said that crypto is likely to stay under pressure.
“I think it could be an ice age,” Jackson said. “I think if you take away the conditions created by the Fed … it changes the outlook.”
Gripping questions about regulation and cryptotechnology
Of course, many cryptocurrency advocates disagree. Dan Morehead, CEO of the investment company Pantera, said in a note last week that the sector should remain strong because the use of krypton networks has increased.
He pointed in particular to the growth in decentralized finance, or DeFi, where financial activities such as trading can be carried out without the need for intermediaries, thanks to crypto-technology.
However, many investors are less convinced, with regulation a particular concern. Russia’s central bank, a cryptocurrency hub, this week proposed a direct ban on mining and transactions, which contributed to Friday’s sale. European regulators may be tightening their rules, and Spain and the United Kingdom are cracking down on crypto ads.
James Malcolm, head of currency strategy at UBS, told Insider that he believes problems with crypto-technology could be one of several factors, along with stricter regulations, that could drag the crypto world into a new winter.
Malcolm quoted a blog by the founder of the Signal messaging app, who concluded that blockchain technology is clumsy and far from decentralized. Meanwhile, users of the ethereum krypton network have become furious about congestion and high transaction fees, which are proving to be very difficult to fix.
“Many people in the technology field seem to be wondering whether or not [crypto tech] is it effective, “said Malcolm.” That raises the question of whether it was so obvious to next-generation technology, why are not many large technology companies all over the place? Why is Google not heavily invested? “