Citi Says Fallout From Terra Collapse Unlikely to Hit Wider Financial System

Cryptocurrency markets have been under pressure in the past week following the collapse of the third-largest stablecoin, terraUSD (UST), Citi said in a note published May 13.

The fall in crypto markets took place against the backdrop of already weak risk assets, and Citi says it does not expect a broader economic fallout because the digital-asset market is still relatively small compared with traditional asset classes and the make-up of household wealth.

The analysts said they saw no apparent “lead effect” from bitcoin to S&P 500 index futures. The recent weakness in bitcoin and equities appears “contemporaneous,” according to the report. Still, given the existing poor sentiment in equities, the fall in crypto markets doesn’t help, it said.

Bitcoin is expected to remain highly volatile, and is influenced by many factors including potential regulatory action, the report added, noting that the BTC price has declined close to “production cost and spot adoption model implied valuations.”

The bank sees production costs as a floor because below these levels it is “less economical for mining, which may lead to a decline in hash rates, and an adjustment in algorithm difficulty to keep the bitcoin mining reward rate constant.”

Citi says regulatory interest in stablecoins is likely to increase after the UST depegging.

Morgan Stanley said in a report Thursday that clients were asking whether the large drop in crypto prices and the depegging of stablecoins poses a “more systematic risk for broader financial markets.”

Read more: Morgan Stanley Says NFTs Next to Watch After UST Collapse