Cryptocurrency markets were under pressure last week following the collapse of the third-largest stablecoin, terraUSD (UST), Citi said in a note published May 13.
The decline in crypto markets took place against a backdrop of already weak risk assets, and Citi said it does not expect a broader economic impact because the market for digital assets is still relatively small compared to traditional asset classes and the composition of household wealth.
The analysts said they see no obvious "run-up effect" from Bitcoin to S&P 500 index futures. The recent weakness in Bitcoin and equities appears to be occurring "simultaneously," according to the report. However, given the poor sentiment in equity markets, the decline in crypto markets is not helping, the report said.
Bitcoin is expected to remain highly volatile and influenced by many factors, including potential regulatory action, the report added, noting that the BTC price has fallen "close to the implied valuations of the production cost and spot adoption model.
The bank sees the production cost as a floor because below that level "it is less economical to mine, which may lead to a decline in hash rates and an adjustment in algorithm difficulty to keep bitcoin mining rates constant."
Citi said regulatory interest in stablecoins is likely to increase following the elimination of the UST.
Morgan Stanley said in a report Thursday that clients are wondering whether the sharp decline in crypto prices and depegging of stablecoins poses a "more systematic risk to financial markets in general."