The insolvency of the Bahamas-based cryptocurrency exchange FTX was the topic of DVFA’s current monthly question. Other crypto exchanges such as Cronos – but also most cryptocurrencies – had also lost significant value after the FTX insolvency.
Peter Thilo Hasler, board member at DVFA, summarises: “The insolvency of FTX has not necessarily boosted confidence in the crypto industry. But digital assets do not play a major role in the diversification of portfolios anyway. However, the DVFA investment professionals do not want to rule out such a diversification in the future.
Low contagion effects for other segments of the capital market
The vast majority of 70% of the DVFA investment professionals surveyed believe that the effects of FTX’s insolvency will be limited to the crypto markets and that spillover effects on other asset classes are not to be expected. However, due to the isolated nature of this asset class, crypto exchanges and currencies could remain under pressure.
Without any consequences, 13% of the respondents see the FTX insolvency. In their view, the insolvency of FTX describes a homemade problem of the company; they do not expect contagion effects for other segments of the capital market.
Slightly more respondents (17%) consider contagion possible. They do not want to rule out an influence on classic stock exchanges and even the triggering of an economic crisis; after all, FTX was the third largest crypto exchange in the world.
Large majority not surprised by insolvency
The next question was whether insolvency could have been foreseen. Multiple answers were possible here. That the large number of complex and non-transparent transactions with related parties could have been a sign of insolvency was thought by 82% of respondents.
12% of the respondents consider it unusual that FTX employed two auditing firms.
16 %, on the other hand, take the view that the insolvency could not have been foreseen, even though liquidity problems had been discussed in various media weeks before the actual news.
Cryptocurrencies not very suitable for diversification
The third question dealt with the investability of cryptocurrencies. 43% of the investment professionals classify cryptocurrencies in principle as a non-investable asset class due to the lack of an intrinsic value.
38% of the respondents would not invest in cryptocurrencies at present, but would not rule this out in the future. However, they would wait for further developments before diversifying their portfolios accordingly.
A different view is held by those 19% of respondents who definitely classify cryptocurrencies as a component of a diversified multi-asset portfolio because they have low correlation coefficients to other asset classes.
No significant recovery of bitcoin expected in the near future
Arguably the world’s most popular cryptocurrency, bitcoin is currently trading 75% below its high. Asked about the expected price development in the coming twelve months, 47% of respondents see the bitcoin as fairly valued at the current price level. They justify this in particular with the fact that cryptocurrencies have one or two use cases, but it would still take years for them to become established.
40 % of respondents do not see any use cases for cryptocurrencies. They think the hype around bitcoins is exaggerated.
A minority of 13 %, on the other hand, believes that cryptocurrencies have a future because fiat money will be worth less and less in the long term as a result of behavioural economic deficits on the part of political decision-makers. In their view, bitcoins will return to old highs in the medium term.
Source: DVFA Monthly Survey, 13th December 2022
Image: Chris Liverani via Unsplash