Davide Chiantore on Cryptocurrencies
The cryptocurrency sector is particularly susceptible to the central bank and interbank interest rate movements, this is because they are on the outer edge of all that is a core investment, so both bonds and equities are considered a relatively aggressive asset, so their sensitivity and volatility is very high both geopolitical risks, financial risks, and especially rates.
In recent years, cryptocurrencies have been very successful also thanks to the trend in rates, hence this compression of bond and equity yields, we are coming out of a historical phase where there was a great propensity for growth investments and everything related to the technological world.
It is not surprising that cryptocurrencies have generated heavy losses in recent sessions, precisely because of the lack of these conditions, particularly the movement in rates.
There are also reasons intrinsic to cryptocurrencies such as problems with certain coins, but the truth is that at the root of these collapses was a first-rate hike by the US Central Bank, there is a general repricing of everything rate-related by the more traditional financial markets. Therefore, cryptocurrencies continue to be an extremely risky sector right now because we have no visibility into how rates will move in the coming months. Besides possible rebounds, we can expect volatility in these asset classes to continue to be very high in the coming weeks.
Right now, the safest cryptocurrencies are perhaps the most historical ones, with a larger market cap, such as Bitcoin, because this sector also follows a very similar trend, which we could imagine for the equity sector, in which the stocks tend to be more aggressive are the ones that gain the most in risk-on phases and in phases of falling rates, vice versa in a moment of volatility and search for safety are also the stocks that tend to perform the worst.
A similar argument can be made for the world of crypto and we might expect that especially the newer ones with market caps, which have risen faster in this last phase, will also be the ones most prone to disinvestment by investors.
We think that rates will continue to rise in the short to medium term, while in the long term there could be some easing in this respect, because on the one hand we have supply, which is what has been driving prices up so much at the moment, coming back into balance with demand, and on the other hand on the payrolls and labour front we think that this labour shortage is coming to an end. In the coming months, there could be an easing of these rate restrictions, but that doesn’t mean that between now and then we could see some more substantial rises, especially from the Federal Reserve. Much quieter, on the other hand, should be the situation in Europe with the ECB, which has already said it wants to raise rates, but in a decidedly less aggressive manner.
We advise the utmost caution on the crypto sector, at this time suitable for those with a risk profile and above all a long-term time horizon, this could be a favourable moment to enter some cryptocurrencies from a long-term perspective, but with all due caution. The trend of rate inflation will help to understand the trend of this sector, which as we have seen, is very subject to the volatility of both the markets and everything that happens at a macroeconomic and geopolitical level.