Bank of America thinks 2023 will be the year of price divergence among cryptocurrencies. (Taylor Simpson/Unsplash)
The cryptocurrency market is off to a much better start this year than most had expected with the token universe up 42% year to date to $1.1 trillion, Bank of America said in a report on Friday.
“We expect 2023 to be the year of token price divergence,” the report said, “with tokens that provide utility and a call on cash flows outperforming meme and governance tokens.”
The bank views cryptocurrencies that power smart contract-enabled blockchain platforms, on which developers can build applications, as growth assets exposed to the same risks as growth stocks. It notes that these cryptocurrencies and small-cap liquid tokens have led this year’s rally.
Bank of America strategists remain cautious on growth, as strong economic data has delayed the timing of a recession and also “indicates the potential for reflation and additional rate hikes.”
“Given that January’s risk asset rally was partially driven by short-covering and mean reversion, the likely higher-for-longer rate environment may result in pressure for growth and, therefore, digital assets,” analysts Alkesh Shah and Andrew Moss wrote.
Shorting is a way of betting that a price will decline. An investor borrows a security and sells it in the hope that the price will drop. They then repurchase the security and return it to the lender. Mean reversion is a theory used in finance that suggests asset prices tend to revert to their long-term mean or average level.