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Reasons to think things will get worse, leading to a crypto winter

January 24, 2022
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Reasons to think things will get worse, leading to a crypto winter

On January 24, in a recent report, UBS analysts led by James Malcolm said that the Federal Reserve’s interest rate hike in 2022 will reduce the attractiveness of cryptocurrencies such as Bitcoin in the eyes of many investors. This is because rising interest rates will overturn the notion that Bitcoin is a good alternative currency or store of value.

Other factors are that the technology has many shortcomings and faces regulatory hurdles. But UBS analysts believe it’s reasonable to expect things to get worse, leading to a “crypto winter” in which assets slide and then fail to recover for an extended period of time. The last “crypto winter” occurred in late 2017 to early 2018, when Bitcoin fell from nearly $20,000 to below $4,000 and stayed below $4,000 for more than a year, causing many investors to lose interest in digital assets .

Malcolm and his team point out that if central banks act to control inflation, it will undermine the argument that investors should hold bitcoin to protect against price increases. In addition to this, another issue that could lead to a significant price drop is the flaws in cryptography. For example, UBS analysts said that the development of blockchain technology is difficult because its decentralized design requires all members of the network to audit and verify transactions. The third issue is regulation.

Rampant speculation on crypto networks “will inevitably lead to closer regulation to protect consumers and financial stability,” UBS said. Stablecoins and (decentralized finance) projects with skyrocketing prices seem certain to face even greater setbacks from the authorities in the coming months.

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