Bitcoin and cryptocurrency prices have somewhat stabilized this week after a steep sell-off that wiped over $1 trillion from the combined crypto market, with ethereum, BNB, solana, cardano and XRP tanking and sparking fears of a new crypto winter.
The bitcoin price dropped from a peak of almost $70,000 per bitcoin late last year to around $30,000 this month before rebounding slightly—even as some bullish investors bet the bitcoin price will eventually hit staggering highs.
Now, Wall Street giant Goldman Sachs has warned increased crypto adoption may not translate into higher prices and could even damage the narrative that bitcoin, ethereum and other coins diversify a portfolio.
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“Mainstream adoption can be a double-edged sword,” Goldman Sachs strategists wrote this week in a note first reported by Bloomberg. “While it can raise valuations, it will also likely raise correlations with other financial market variables, reducing the diversification benefit of holding the asset class.”
Bitcoin and cryptocurrency adoption has soared over the last year, rising along with the price of most major cryptocurrencies, including ethereum, BNB, solana, cardano and XRP—with some recording eye-watering triple-digit percentage increases.
Meanwhile, the use of crypto technology to recreate traditional financial services, known as decentralized finance (DeFi), and collectible non-fungible tokens (NFTs) that are both largely built on ethereum’s blockchain have soared in popularity as investors pour cash into them.
However, Goldman rival JPMorgan has warned ethereum’s high transaction fees and network congestion risk handing NFT market share to rival blockchain solana—something that could be a “problem for ethereum’s valuation.” Bank of America has said solana could become the “Visa of the digital asset ecosystem.”
Elsewhere, the world’s biggest technology companies, led by Facebook’s newly branded parent company Meta and now including Apple and Microsoft, are forging into the virtual reality-based metaverse—with some predicting bitcoin, crypto, DeFi and NFTs could have a part to play.
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The metaverse could provide a “secular tailwind” for some crypto-assets but they won’t be “immune to macroeconomic forces” such as the Federal Reserve raising interest rates and shrinking its huge balance sheet, Goldman analysts warned.
“Over time, further development of blockchain technology, including applications in the metaverse, may provide a secular tailwind to valuations for certain digital assets,” the strategists wrote. “But these assets will not be immune to macroeconomic forces, including central bank monetary tightening.”
The latest crypto crash, reducing the combined value of the crypto market from around $3 trillion to just over $1.5 trillion, was sparked by fears the Fed could soon hike rates. Global stock markets have also sunk as investors face up to the reality of a return to pre-epidemic monetary policy.
Many long-term bitcoin and crypto investors aren’t worried, however, with Cathie Wood’s Ark Invest this month predicting the bitcoin price could exceed $1 million by 2030—with ethereum’s market capitalization potentially topping $20 trillion.