It’s no secret that cryptocurrencies have seen alarming drops in their value, losing a cumulative $2 trillion in value during what many have dubbed a “crypto winter.”
Investment contrarians are never hard to find, so it’s also unsurprising that despite (or because of) the crash, there’s plenty of optimism around crypto; some will even tell you that cryptocurrency 2022 = Amazon 1999.
But for businesses wondering what role crypto will play in their future, we need a more measured analysis.
The Cognizant take
“First, let’s put this into context,” says Jerome Dumaine, who serves as both Global Capital Markets Industry Program Lead and Banking and Financial Services Diversity and Inclusion Lead at Cognizant.
The test of every asset class, he says, is adoption by institutional investors. “Before the crash, our analysis showed that institutional investors’ adoption already accounted for one-sixth of all positions in crypto assets. That included traditional institutional investors, crypto-only funds and corporate holdings.”
This class of investors were planning to grow their allocations in crypto assets by 7.5% in the next five years, Dumaine says. While modest, this is real growth despite regulatory and other uncertainties. “We expect this trajectory to continue when volatility comes back to pre-crash levels,” he says.
Dumaine adds that recent events prove crypto assets behave more like the market than many previously thought. Before the crash, there were wild theories about the crypto market being an “anti-market” that could serve as a hedge against traditional markets. Others believed it would move in the opposite direction of traditional markets. “In fact,” he says, “it moved in the same direction, but with a larger amplitude.”
Interestingly, Dumaine says, Gen Z investors haven’t abandoned crypto assets. “This is still their generation’s currency and asset of choice—part of their lifestyle,” he says.
Dumaine believes the crash is likely to accelerate plans worldwide to tighten regulations on these assets, which should reduce future volatility.
Bottom line? “While crypto-only funds may take some time to come back,” he says, “the crash helped investors refine their expectations on the behavior of crypto assets and update their investments and risk management models. They will restart their investments in crypto assets accordingly as part of a diversified portfolio.”