Bitcoin and other cryptocurrencies rallied on Thursday as investors snapped up stocks and other “risk assets” after days of selling pressure.
Bitcoin was ahead 2.3% in afternoon trading to $43,000. Ether, Solana, Terra, and other major tokens were also rallying, pushing the overall market up 2.3% to $2 trillion in market value, according to CoinMarketCap.
Google is developing a new blockchain unit, according to a report in Bloomberg News, in the latest sign that Big Tech is looking at how to capitalize on the crypto economy.
Shivakumar Venkataraman, an engineering vice president at Google, is running a unit focused on “blockchain and other next-gen distributed computing and data storage technologies,” Bloomberg reported.
Google, the major division of Alphabet (ticker: GOOGL), didn’t immediately respond to a request for comment.
Venture capital is also flooding into the crypto space. One of the largest players—Andreessen Horowitz—aims to raise $4.5 billion for a new fund dedicated to blockchain-based companies, according to the Financial Times.
More than $30 billion of venture capital and other forms of private equity poured into crypto startups in 2021, according to PitchBook, up more than sevenfold from 2020.
Yet capital may be flooding into crypto at a tough time for the industry and tech overall. Investors have grown skittish over rising interest rates as the Federal Reserve tightens monetary policy. High-valuation tech stocks have been punished. Cryptos have suffered as well; the overall market has lost a third of its value, or $1 trillion, since peaking at $3 trillion last November.
Tighter monetary policies are one of a number of reasons that UBS, in a research note published on Jan. 14, is warning of a second “crypto winter.” The last such “winter” in 2018 saw Bitcoin and other cryptos fall more than 75% from previous peaks. They then took about three years to return to previous highs from 2017.
As UBS sees it, cryptos took off in 2021 partly because of abnormal monetary policies that flooded global markets with excess liquidity. But central banks are expected to gradually normalize policies, pressuring alternative currencies like Bitcoin that were boosted by “associated excess liquidity.”
The idea that Bitcoin is a store of value in an inflationary climate is also coming under more scrutiny, according to UBS. While sovereign “fiat” currencies may lose purchasing power amid high inflation, their supplies are adjustable—able to contract and expand with economic growth and other variables.
That flexibility may help sovereign currencies retain long-term value, contrasting “with the likes of Bitcoin that are supply-limited and constrained by volatility in being able to function as units of account or media of exchange,” UBS says.
Another headwind is that blockchain technology may take quite a while to reach mainstream financial markets, if it ever does. Blockchain networks like Bitcoin started out as decentralized ledgers, aiming to improve the security, transparency, and accessibility over incumbent payment systems dominated by banks and other institutions. But the Bitcoin network itself is being centralized as miners, who operate the network, consolidate.
Many of the newer blockchains are controlled by companies and entities, moreover, and the industry is shifting to a “proof of stake” model for processing transactions—potentially centralizing the networks in the hands of a few large operators.
“Blockchains don’t scale in practice without turning into the same ‘plutocratic’ systems they were designed to replace,” says UBS. Blockchains are also vulnerable to hacks, fraud, and theft, and they are a long way from mass adoption due to technological complexity, even to change a password for an account.
Finally, speculative excesses are rising—as blockchain-based apps and services attract more users and economic value, they will inevitably invite more regulatory scrutiny. “High-flying stablecoins and DeFi projects seem almost sure to face bigger setbacks from authorities in the coming months,” UBS says.
The takeaway isn’t necessarily that cryptos will collapse overnight, losing value like Dutch tulips that never had much utility. Venture capital is pouring in because blockchain technology could be revolutionary, opening new venues for trading and borrowing securities—along with entirely new ways to monetize digital collectibles with non-fungible tokens, or NFTs.
But the market may be getting pickier about which cryptos and blockchain companies will survive as liquidity dries up, leaving less capital to go around for all.
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