Bernstein analysts offer a cautious bull case for crypto recovery after a year from hell

Business Insider 

Ethereum co-founder Vitalik Buterin speaks at ETHDenver on February 18, 2022 in Denver, Colorado.

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The past year was terrible for the reputation of crypto, especially with the downfall of FTX.
Analysts from Bernstein laid out why they’re still bullish on the crypto space.
Crypto is more than currencies, they said, and there’s much to be hopeful about its future.

Crypto did not have the best year in 2022. While the rest of the economy was on a downward slide, crypto was in a freefall.

The average value of cryptocurrencies dropped 64%. And then came the implosion of FTX, a company that had plastered ads across America for most of 2022. Wall Street banks — which previously sought partnerships with crypto firms to offer access to customers — are newly skeptical about the space. And FTX c0founder Sam Bankman-Fried pleading not guilty to federal charges promises the fallen crypto boos will stay in the public eye.

So, yes, there are many reasons to be pessimistic about crypto in 2023. But Bernstein analysts Gautam Chhugani and Manas Agarwal offer crypto true believers a few reasons to keep the faith.

In a note published on January 3, they wrote that despite a catastrophic 2022, the larger crypto ecosystem still has potential. Its decentralized nature allows it to bounce back even after debacles like FTX, it has a strong foundation in Ethereum, and crypto will likely benefit from the regulation it will be unable to avoid.

In their words, crypto has a “survival instinct.”  

Crypto keeps bouncing back

The past year was not the first “crypto winter,” and crypto always bounced back fairly easily. Bitcoin saw large price drops in 2014, when annual returns fell by 58%, and again in 2018, with a 74% drop in returns. Both times the currency returned to strength fairly fast. Ethereum — the other large crypto token — followed nearly the same pattern after falling in 2018. 

Crypto’s nature as a mostly decentralized system helps it survive. Chhugani and Agarwal said the contagion impact from FTX has not spread widely.

“FTX was terrible for the reputation of the sector and affected the faith of institutional investors, who invested in FTX,” the analysts said. “But FTX was 10% of the global trading volume and used mainly by wholesale participants such as brokers, trading firms, and large traders.”

Much of the crypto space remains decentralized. Take decentralized finance, or DeFi, which uses the same distributed network of computers to provide financial services to people.

Chhugani and Agarwal said FTX’s collapse had hastened DeFi adoption, which makes DeFi a bright spot in crypto investing, according to crypto VCs. 

DeFi’s rise

With DeFi projects largely insulated from FTX’s impact, the Bernstein analysts noted investor interest might shift towards Ethereum and its mainly application-based ecosystem. 

Ethereum forms the basis of many crypto applications like NFT-based gaming, decentralized social media, and some commerce. These tend to use either the Ethereum blockchain to build or use the Ethereum currency to power transactions. Chhugani and Agarwal said crypto only touches 5% of total internet users, and the primary way of growing the space is through applications. 

“We believe value within crypto will migrate from the speculative crypto assets to more utility and application-driven ecosystems such as Ethereum,” they said. 

The benefits of regulating the wild west of finance

Agarwal and Chhugani believe regulation is coming for the crypto space and see it benefiting the market. 

Crypto enthusiasts typically deride moves to regulate their space. The blockchain and bitcoin began as a reaction to the 2008 financial crisis, and its first adopters had visions of leaving behind the tightly controlled world of traditional finance.

But as crypto began moving into the mainstream, investors demanded regulation. And after the fall of FTX, those calls have only increased. 

The analysts said even if regulation brings about adjustments in the crypto market, policies bring in a more sustainable ecosystem and attract more institutional investors. In their view, regulated onshore exchange companies will survive the current cycle. 

For Agarwal and Chhugani, crypto still has strong potential to grow, particularly as people stop seeing it as a quick money-making speculative asset and instead focus on its ability to be a part of the infrastructure of the next decade of internet development.

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