24.02.25 - Largest crypto theft
The news is not new anymore. Last Friday, hackers stole USD 1.5 billion worth from crypto exchange Bybit.
Markets: Cryptos showed some correction after the news, recovered during the weekend and now show more downside with Bitcoin below USD 95’000.
My View: The psychological effect of such an incident should not be underestimated. This theft highlights the risks of market disruption and could have lasting implications for the digital asset industry.
I was surprised that the event had only a minor impact on cryptocurrency prices, especially considering the rapid recovery over the weekend. However, I believe that in the near to mid-term, this incident could have a significant impact on the overall crypto market. Institutional investors, with their bigger assets power and known for their conservative risk profiles, might hold back from allocating new capital to digital assets for a longer time period after such an event. Should this turn real, this would definitely lead to reduced inflows in digital assets. Then, the market would only be driven by the remaining private investors and speculators.
A personal flashback to the years 2006-2008 with a similar situation when institutional investors caught on the wrong foot. Do you remember the time of oil prices above USD 140? With the oil price and overall rally in commodities that period, banks actively encouraged institutional investors to add commodities in their asset allocation. Frankly speaking, major driver for this change advised to clients, the increase of margins and therefore higher returns for the bank by adding a new product category with higher fees. With the conservative stance and set-up, institutional clients took time to consider. With prices advancing further, they slowly started to adapt their asset allocation adding commodities or oil to the portfolio. This happened just short period before the oil price started to collapse. After that event and with such a negative experience, any institutional investors ever was open to add commodities to their asset allocation. The ones invested at that time, took the loss and deleted the asset class thereafter out of their benchmark. A negative experience with a big psychological effect.
I already highlighted a potential risk of a spill-over effect from collapsing cryptos over to the stock market in my blog article “Cryptos in correction mode - risk of spill-over effect?” on 5 July 2024.
The reason of a spill-over effect could be that the most speculative investment space at the moment are cryptos and tech stocks. Both, digital assets and traditional assets are showing some larger losses. This could force speculators to reduce their positions as a higher number of this group of investors is highly leveraged. Looking at prices of stocks with lot of speculators invested, soon we could reach levels which could cause a margin call should prices continue to fall. Margin calls usually trigger heavy sell-offs in markets which then can be used to buy the assets on a cheaper level while leveraged speculators are forced to sell.
Disclosure of ETFMandate portfolio: No allocation in cryptos ever
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