BofA says crypto winter, contagion concerns are overblown

BofA says crypto winter, contagion concerns are overblown

The collapse of the Terra network was due to mass adoption being prioritized over price stability, the bank said.

According to Bank of America (BAC), the second largest U.S. bank, fears of a so-called crypto winter are unfounded.

Investors wondering why digital assets aren't outperforming traditional ones should be aware that the cryptocurrency ecosystem is an "emerging tech asset class, and the tokens that power the ecosystem trade like high-growth, speculative risk assets," analysts led by Alkesh Shah wrote in a May 17 note.

Digital assets face similar headwinds as traditional assets, including: rising inflation, higher interest rates and increased risk of recession, the note states.

Concerns about contagion risks within the crypto ecosystem and spillover effects in traditional financial markets due to the collapse of algorithmic stablecoin terraUSD (UST) are also unfounded, it said, although the collapse likely contributed to Bitcoin's (BTC) recent volatility.

UST is not backed by traditional assets, and the loss of its peg shows the durability of the broader stablecoin market as the largest stablecoins have maintained their pegs, it added.

Bank of America said the collapse of the Terra network was due to it prioritizing UST adoption over its price stability, and while it is not positive about plans to revive UST, it still sees the potential for a successful algorithmic stablecoin.

Regulation of stablecoins is expected to lead to increased disclosure of algorithmic stablecoins, but a complete ban seems unlikely, the note said.

A ban on algorithmic stablecoins would be "premature" and could slow the growth of the ecosystem, the report added.