Mainstream markets shrug at volatile US$1t crypto rout

[LONDON] Traditional assets are riding out the cryptocurrency storm so far, a sign that mainstream exposure to volatile digital tokens may be comparatively limited.

MSCI's global equity gauge edged up last week even as the Bloomberg Galaxy Crypto Index endured a near 40 per cent plunge, the worst since the onset of the pandemic last March. Treasuries and the dollar were largely steady.

"Anyone with a reasonable asset allocation would have a very small asset allocation to crypto," Saxo Markets Apac chief executive officer Adam Reynolds said in an interview with Bloomberg Television. "I don't think it should make up so much of someone's portfolio that these sorts of moves are going to be damaging to someone's own finances."

The market value of cryptocurrencies has plunged about US$1 trillion from a peak of some US$2.6 trillion this month, a slide that stoked questions about possible spillovers from lost wealth and damaged sentiment. Some commentators see more pain ahead for virtual currencies as leveraged positions in tokens like Bitcoin and Ether are closed out and regulators step up oversight.

A mid-week report from blockchain analysis firm Chainalysis showed over half of the US$410 billion spent on acquiring current Bitcoin holdings occurred in the past 12 months. About US$110 billion of that was spent on buying it at an average cost of less than US$36,000 per coin. That means the vast majority of investments aren't making a profit unless the coin trades at US$36,000 or higher.

Bitcoin posted big swings again over the weekend before climbing on Monday. The largest cryptocurrency was trading at about US$36,500 as of 8:15am in London, still well down from a mid-April record of almost US$65,000.

But trading in various investments - from the Australian dollar and Japanese yen to US equity futures - showed little reaction to the latest crypto gyrations, Mr Reynolds said.

The cross-asset impact of the drawdown in tokens has been mild, a JPMorgan team wrote separately.

Contagion Watch Still, others argue that the sector bears close monitoring. For instance Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York, said in a note that Bitcoin is "firming its grip on markets through volatility, liquidity and correlation." He added that the potential for "financial contagion should Bitcoin drop well below US$20,000 cannot be dismissed."

Peter Berezin, chief global strategist at BCA Research, wrote in a note that crypto market pain could hurt other speculative assets like tech stocks in the short term. However, further out, "diminished investor interest in cryptos will benefit the stock market, as investor attention focuses back on equities," he said.

While a narrative of growing mainstream interest accompanied the earlier boom in Bitcoin and some other tokens, the latest volatility spike and price rout underscores the risks to wider portfolios from getting too exposed.

"Large drawdowns, combined with Bitcoin's high volatility, have eventually outweighed the benefits of having it in a portfolio at higher allocations," said Goldman Sachs multi-asset strategist Christian Mueller-Glissmann in a report Friday.

A 5 per cent Bitcoin allocation in a 60-40 portfolio drove roughly 20 per cent of its volatility, compared with 2 per cent from US 10-year bonds, likely far too much risk exposure for institutional investors, he said.

BLOOMBERG

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