The cryptocurrency market has been in a prolonged slump for the past few months, but there are signs of a possible recovery, according to a new report from Morgan Stanley. The investment bank analyzed the factors that have contributed to the decline of crypto prices, such as regulatory uncertainty, environmental concerns, cyberattacks, and competition from central bank digital currencies (CBDCs). It also identified some positive trends that could indicate a reversal of the bearish sentiment, such as increased institutional adoption, innovation in the crypto space, and growing demand from emerging markets.
Morgan Stanley noted that the crypto market is cyclical and has experienced several boom-and-bust cycles since its inception. The most recent one, dubbed the “crypto winter”, started in August 2021, when the total market capitalization of all cryptocurrencies peaked at over $2.5 trillion and then plunged by more than 50% in the following months. The report suggested that this cycle may be nearing its end, based on historical patterns and indicators.
One of the main drivers of the potential recovery is the growing interest and involvement of institutional investors in the crypto space, Morgan Stanley said. The report cited several examples of large corporations, financial institutions, and asset managers that have embraced crypto as an asset class, a payment method, or a technology platform.
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These include Tesla, MicroStrategy, Square, PayPal, Visa, Mastercard, JPMorgan Chase, Goldman Sachs, BlackRock, Fidelity, and many others. The report also highlighted the increasing number of crypto-related funds, products, and services that are being launched or planned by various entities.
Another factor that could boost the crypto market is the continuous innovation and development in the crypto space, Morgan Stanley said. The report pointed out that despite the challenges and setbacks, the crypto industry has not stopped innovating and creating new solutions and applications for various use cases.
Some of the examples mentioned in the report are decentralized finance (DeFi), non-fungible tokens (NFTs), layer-2 scaling solutions, stablecoins, and metaverses. The report also noted that the crypto space is attracting more talent and capital from different sectors and regions.
A third factor that could support the crypto market is the rising demand from emerging markets, Morgan Stanley said. The report explained that many people in developing countries are turning to crypto as an alternative to their local currencies, which are often plagued by inflation, devaluation, or instability. The report also mentioned that some governments in these regions are adopting a more favorable or open stance towards crypto, such as El Salvador, which became the first country to make Bitcoin legal tender in September 2021.
The cryptocurrency market is eagerly awaiting the decision of the US Securities and Exchange Commission (SEC) on whether to approve the first Bitcoin Spot ETF in the United States. A Bitcoin Spot ETF would allow investors to buy and sell shares of a fund that holds Bitcoin directly, without the need for intermediaries or complex derivatives. This would increase the liquidity, transparency and accessibility of the Bitcoin market, as well as reduce the risks and costs associated with custody and storage.
According to Bloomberg Intelligence, a leading provider of research and analysis on financial markets, there is a 90% chance that the SEC will approve the Bitcoin Spot ETF by January 10, 2024. This is based on several factors, such as the positive comments from SEC Chair Gary Gensler, the growing demand from institutional and retail investors, the success of similar products in other jurisdictions, and the recent regulatory developments in the crypto space.
Bloomberg Intelligence also expects that the approval of the Bitcoin Spot ETF would have a significant impact on the price and adoption of Bitcoin, as well as on the broader crypto industry. The report estimates that the Bitcoin Spot ETF could attract up to $50 billion in assets under management in its first year, which would boost the demand and value of Bitcoin. Moreover, the report suggests that the Bitcoin Spot ETF would pave the way for more innovation and competition in the crypto sector, as well as for more regulatory clarity and oversight.
The Bitcoin Spot ETF is not a done deal yet, however. The SEC still has to review and approve the applications from several firms that have filed for the product, such as VanEck, Valkyrie, Wisdom Tree and NYDIG. The SEC also has to address some of the concerns and challenges that it has raised in the past, such as market manipulation, fraud, volatility, custody and investor protection. The SEC has already delayed or rejected several proposals for Bitcoin ETFs in the past, citing these issues.
Therefore, investors should be cautious and prepared for any outcome. The SEC could approve the Bitcoin Spot ETF by January 10, as Bloomberg Intelligence predicts, or it could extend its review period or deny the applications altogether. The decision of the SEC will have a major influence on the future of Bitcoin and crypto in the US and beyond.
Morgan Stanley concluded that while the crypto market is still facing many challenges and risks, such as regulatory uncertainty, environmental concerns, cyberattacks, and competition from CBDCs, there are also signs of optimism and opportunity. The report stated that the end of the crypto winter may be near, but it also cautioned that investors should be prepared for high volatility and uncertainty in this nascent and dynamic market.