BofA Says Crypto Winter, Contagion Risk Concerns Are Overdone

Concerns of a so-called crypto winter are unfounded, according to Bank of America (BAC), the second-largest U.S. bank.

Investors wondering why digital assets are not outperforming traditional ones should be aware that the cryptocurrency ecosystem is an “emerging tech asset class and the tokens that power the ecosystem trade like high growth, speculative risk assets,” analysts led by Alkesh Shah wrote in a May 17 note.

Digital assets are faced with similar headwinds to traditional assets, including surging inflation, higher interest rates and the increased risk of a recession, the note said.

Worries of contagion risk within the crypto ecosystem and spillover effects in traditional financial markets due to the collapse of algorithmic stablecoin terraUSD (UST) are also unfounded, the bank said, though the slump probably contributed to recent volatility in bitcoin (BTC).

UST is not backed by traditional assets and the loss of its peg shows the durability of the wider stablecoin market, because the largest stablecoins maintained theirs, it added.

Bank of America says the collapse of the Terra network was due to its prioritization of UST’s adoption over its price stability. While the bank is not positive about UST revival plans, it still sees the potential for a successful algorithmic stablecoin.

Stablecoin regulation is expected to lead to increased disclosures for algorithmic stablecoins, but an outright ban seems unlikely, the note said.

Banning algorithmic stablecoins would be “premature” and could slow the ecosystem’s growth, it added.

Read more: Citi Says Fallout From Terra Collapse Unlikely to Hit Wider Financial System