- Cryptocurrencies are likely to plunge even further as the Fed hikes interest rates, a senior JPMorgan strategist said.
- "At some stage, I expect to see massive losses in crypto, because there is nothing there," David Kelly told Insider.
- Kelly's crypto skepticism may not be universally shared at JPMorgan, which ventured into the metaverse Tuesday.
Cryptocurrencies are likely to plunge even further as the Federal Reserve raises interest rates and brings an era of "crazy" speculation to an end, according to a senior JPMorgan strategist.
"At some stage, I expect to see massive losses in crypto, because there is nothing there," David Kelly, chief global strategist at JPMorgan Asset Management, told Insider.
Cryptocurrencies have already dropped sharply, with bitcoin tumbling from a high of above $68,000 in November to around $44,000 on Wednesday. The market capitalization of all cryptocurrencies has slumped from above $3 trillion in November to less than $2 trillion today.
Investors have pivoted away from riskier investments, given the Fed prepares to hike interest rates numerous times in 2022 in an effort to tame inflation.
But Kelly said the rout isn't done yet, and he argues that digital assets are in particular danger because they serve no purpose. "It's still all fairy dust and very vulnerable to higher interest rates," he said.
The Fed's pandemic-era stimulus forced bond yields down to ultra-low levels, which prompted investors to turn to highly speculative investments such as cryptocurrencies and unprofitable tech stocks, according to the veteran strategist.
"If you push real interest rates up to a positive level, you will starve the crazy ideas of cash and funnel money towards projects that actually have a positive, real economic return," he said.
Kelly's skepticism about digital assets is not universally shared within JPMorgan, which gives customers access to crypto investment products.
The lender has a dedicated blockchain unit, called Onyx, that on Tuesday revealed it had bought a space within a crypto-powered metaverse called Decentraland. A metaverse is a virtual world where avatars can interact with each other, play games, hold meetings, trade assets and many other activities.
Kelly's thinking is more in tune with that of JPMorgan CEO Jamie Dimon, who in October called bitcoin "worthless." Yet Dimon has said the bank's customers are adults, and the bank will give them access to digital assets if they want it.
The Fed could rock markets if it moves faster than investors currently expect, Kelly said — perhaps by hiking interest rates by 50 basis points in March, in response to January's red-hot inflation numbers.
"Anything carrying very high valuations would be vulnerable, if you expect the Fed to be more aggressive early," he said.