Cryptocurrency has a problem with ‘bad actors’ and insufficient oversight — but the future could be brighter, Stifel GMP analysts say

The collapse of cryptocurrency exchange FTX was one of the sector’s “biggest calamities,” according to analysts at Stifel GMP.  In the aftermath, Bitcoin hit a 24-month low in November, and the price of Ethereum is down 65% year-to-date. 

However, the problems are solvable, the analysts argued in a pair of notes published Thursday.

“It’s important to recognize that the root of this mess mainly stems from the mismanagement of customer funds by bad actors and a lack of regulation/oversight,” Stifel said, seemingly referring to FTX founder Sam Bankman-Fried, among others. 

“Centralized intermediaries will need to enact measures that offer improved customer protection … while we wait for the gaps to be filled with adequate regulation and oversight.”

READ: Bitcoin and Ethereum end week in the green, but true recovery is a long way off

The spot price of Bitcoin is currently just under $17,000, and that diminished value has knock-on effects on the underlying technology, Stifel noted. The price, plus the increases in network hash rates have pulled Bitcoin mining margins down to “alarming levels.”

That said, relief is coming for mining operators. 

“A material number of machines were taken offline in the back half of the month as the network hash rate fell from an all-time high of ~273 EH/s to its current level of 238 EH/s,” analysts wrote. “ As such, it is expected that a downward difficult adjustment will take place next week and should provide some relief to mining operators.”

In particular, the firm cited Hut 8 Mining Corp (TSX:HUT) and HIVE Blockchain Technologies Ltd as “well-positioned to weather the current bitcoin price/hash rate environment … as newer gen mining equipment and sub-scale peers become increasingly more attractive.”

In the meantime, crypto holders are increasingly keeping their assets a little closer to the vest. After the collapse of FTX, there was a spike in transaction volume on decentralized exchanges (DEXs). 

“We believe DEXs could represent a higher market share in the future as cryptocurrency users may opt for self-custody and may be more inclined to access protocols vs. centralized exchanges,” analysts wrote. 

The future isn’t all doom and gloom either, Stifel said.

“While crypto markets have pulled back, developers remain laser-focused,’ analysts said.  “We view the current entry point as attractive for investors given our long-term view that brands will leverage this new immersive technology to drive engagement amongst their following and be part of their customers’ identity in the digital world.”

Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com

Follow him on Twitter @andrew_kessel