Deutsche Bank: Crypto Free Fall Could Continue Because of the System’s Complexity

The free fall in crypto markets could continue because of the system’s complexity, Deutsche Bank (DB) said in a report Wednesday.

Getting token prices to stabilize is difficult because there are no “common valuation models like those within the public equity system,” the bank said. In addition, the cryptocurrency market is highly fragmented, according to the report.

Furthermore, speculative trades are likely to involve the simultaneous use of several coins, which increases spillover effects, the bank said. Whatever liquidity might exist in these markets could quickly evaporate, which would erode confidence in prices and increase the likelihood of contagion, it added.

Macro risk is also a concern.

As bitcoin BTC$89,529.48 and other cryptocurrencies are speculative, high-risk assets, they are “disproportionately affected by central bank tightening,” the report said.

The U.S. Federal Reserve is nowhere near finished with its tightening cycle, the European Central Bank (ECB) has “yet to lift off,” and the Bank of Japan (BOJ) is facing “market pressures that are adding turmoil even to safe-haven markets,” the note said. These macro factors are amplified by the possibility of a recession in the U.S. and investor pessimism. Both are harmful to speculative assets, and any macro shock could test the recent lows in cryptocurrencies prices and “reignite contagion risks in the DeFi ecosystem,” it added.

The bank’s economists predict a U.S. recession in 2023 and peak headline inflation in the country of 9.1% in September; economists have compared today’s “global stagflation winds” with the 1970s, when energy was the top-performing industry. “Unless bitcoin is becoming digital oil” its performance may be modest during a period of high inflation, the bank added.

Deutsche Bank notes that bitcoin BTC$89,529.48 and other digital assets have been increasingly correlated with the Nasdaq and the S&P 500 stock indexes in recent months. Based on its past correlation with the S&P 500 and using a baseline S&P 500 price of 4,750, the bank says BTC could reach $28,000 by the end of the year, adding that this would be a 32% rally from current levels, but still less than half of its all-time high from last November.

Read more: Bank of America Says ‘Crypto Winter’ Concerns Haven’t Frozen Investor Interest