Institutional Investors Forgo Digital Assets Following FTX Crash

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  • The abrupt fall of the San Bankman-Fried company has damaged the confidence of institutional investors in the cryptocurrency market.
  • The argument that cryptocurrencies are havens of value and financial instruments to diversify investment portfolios has been discredited.

While high-risk assets like cryptocurrencies were being squeezed out of investment portfolios since the beginning of the year, the FTX bankruptcy appears to have further undermined institutional investor confidence in digital assets. 

The crypto winter generated by the pessimistic outlook for inflation and interest rates this year, along with the collapse of cryptocurrency trading platforms, hedge funds, and shady projects like TerraUSD have ended up sapping investor interest in these types of investments, at least in their core portfolios. 

Effect of the Crisis Caused by FTX Extends

The effect caused by the abrupt crash of FTX has spread to the entire cryptocurrency market in the last two weeks. The outlook for Bitcoin and hitherto mighty stablecoins, which have lost their peg to the dollar, has been worrying. 

For many professional money managers, the use of cryptocurrencies as financial instruments to diversify their portfolios or as a store of value (digital gold) has been discredited, says Bloomberg. They consider the loss of more than two-thirds of the value of the crypto market and its current structure “too risky.”

“What’s become clear is it will not find a home in institutional asset allocation,” says multi-asset portfolio manager at Pinebridge Investments in London, Hani Redha, referring to Bitcoin and the other cryptocurrencies.

“There was a period when it was being considered as a potential asset class that every investor should have in their strategic asset allocation and that’s off the table entirely,” he added.

According to Bank of America strategists, the fall of Bitcoin this year represents the fifth largest financial collapse of all time, and the largest since 1970. In the last year, its value has fallen by 77%, going from $69,000 to just $16,500, with a probability of falling to as low as $13,000.

It was believed that the worst of the crypto winter had already passed when the FTX financial scandal suddenly exploded, revealing the mismanagement of the leading company of former American billionaire Sam Bankman-Fried. A mere two weeks ago the company was considered the second largest in the world in terms of trade volume.

Digital Assets Cease to be “Value Havens”

Crypto promoters are running out of arguments, as many DeFi startups and crypto projects fail. The notion of digital assets as safe havens of value in times of inflation and turbulence is being destroyed by daily bad news.

The revelation of FTX's lack of strength has been devastating for large investors. Which in turn is “raising questions about the viability of the crypto ecosystem,” says Fidelity International Chief Investment Strategist Salman Ahmed.

The expert points out that if before it was difficult to argue the need to include digital assets in investment portfolios, now this type of investment is under great pressure. The losses generated by the financial products associated with Bitcoin and other cryptos cause a greater aversion to risk.

Confidence in Crypto Falls

Asset management firm Bridgewater estimated earlier in the year that Bitcoin holdings held by institutional investors stood at around 5%.

At that time, banking strategists and major asset management firms advised that cryptocurrencies could not be missing from any portfolio seeking to diversify and maximize their investment.

But now there are very few who continue to consider crypto as a healthy investment asset and rather advise caution. “The argument for investing in crypto as diversification died some time ago,” Nikolaos Panigirtzoglou, a strategist at JPMorgan Chase & Co., said recently in an interview.

Morgan Stanley analyst Mike Cyprys believes the FTX scandal and crypto market crash could eventually benefit the likes of the Nasdaq Stock Market and CBOE Global Markets Inc. that have a track record as risk managers.

On the Flipside

  • The collapse of the cryptocurrency market has done nothing but confirm the view of those who consider digital assets to be a “pyramid scam.”

Why You Should Care

If digital assets are not regulated soon under a legal framework with global parameters, the market risks sinking further. This would cause more investors to abandon ship and the price of cryptocurrencies to fall more rapidly.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

Author

Santiago is a Venezuelan blockchain reporter specializing in economic and financial issues, with special emphasis on stablecoin trading as well as political and regulatory issues related to Latin America. Every day he reviews and analyzes movements in the crypto market to offer readers first-hand information that can help them make sound decisions in the exciting world of crypto.