Capital is pouring in, but a crypto winter is on its way, according to UBS of

© Reuters. – Analysts at investment bank UBS have warned that cryptocurrency markets may experience another “winter” of falling prices and not recovering for years.

The bank thus refers to the “winter” of 2018, when it and other cryptocurrencies fell more than 75% from previous highs. It then took them about three years to return to previous heights in 2017.

Large investors remain interested

Venture capital flows into the crypto space. According to the Financial Times, one of the biggest players – Andreessen Horowitz – intends to raise $ 4.5 billion for a new fund dedicated to companies working with blockchains.

More than $ 30 billion in venture capital and other forms of private equity flowed into cryptocurrency startups in 2021, according to PitchBook, more than seven times more than in 2020.

Crypto is approaching a turning point

According to UBS, cryptocurrencies gained momentum in 2021 in part due to liberal monetary policies flooding global markets with excess liquidity. But central banks should gradually normalize their policies and put pressure on alternative currencies like bitcoin, which have been boosted by “the associated excess liquidity.”

The idea that bitcoin is a store of value in an inflationary climate is also under closer scrutiny, according to UBS. While sovereign currencies may lose their purchasing power in the event of high inflation, their reserves are adjustable – they may contract and expand depending on economic growth and other variables.

This flexibility can help government currencies maintain their value in the long run, as opposed to “currencies like bitcoin, which have limited supply and are limited in their ability to act as a unit of account or currency of volatility,” says UBS.

Monetary tightening is one of the many reasons UBS is warning of another “crypto winter”.

Is Crypto about to lose its soul?

Blockchains like bitcoin began as decentralized ledgers with the aim of improving security, transparency and availability over existing payment systems dominated by banks and other institutions. But the Bitcoin network itself is becoming more centralized as the miners who operate the network consolidate.

In addition, many of the new blockchains are controlled by companies and entities, and the industry is moving towards a “proof of stake” model for processing transactions, which risks centralizing networks across blockchains. the hands of a few large operators.

Blockchain faces many challenges

“Blockchains cannot expand in practice without becoming the same systems they are designed to replace,” UBS claims. Blockchains are also vulnerable to hacks, fraud and theft, and they are far from widespread due to the technological complexity of even changing an account password.

For example, blockchain technology is difficult to scale because of its decentralized design, which requires everyone on the network to be able to oversee and verify transactions, UBS analysts said.

Finally, speculative excesses are on the rise – as blockchain-based apps and services attract more users and economic value, they will inevitably invite a closer regulatory inquiry. “High-flying barn coins and DeFi projects almost seem to be facing major setbacks from the authorities in the coming months,” says UBS.

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