Because of government and central bank stimulus, cryptocurrencies have traded like risk assets, but tighter Federal Reserve policy means that the “liquidity-driven crypto momentum trade” has reversed, Morgan Stanley said in a note published Tuesday.
The report stated that the growth in bitcoin’s market capitalization has generally tracked the growth in the global M2 money supply, noting that the crypto market capitalization has grown 10-fold since the beginning of 2020 during central bank easing. The cryptocurrency market cap has dropped from a high of $2.92 trillion in November of last year to less than $2 trillion.
Despite the recent drop in cryptocurrency prices, the bank’s analysts said that the creation of digital assets is still high, with more than 100 created in the last week or so, primarily on decentralized exchanges. It was noted that the growth of Decentralized Finance (DeFi) users has tracked the price of ether.
DeFi is a catch-all term for lending, trading, and other financial transactions conducted on a blockchain without the use of traditional intermediaries.
Morgan Stanley observed that trading activity has been weak during the “crypto bear market,” with exchange trading volumes of around $750 billion in March, less than half of the peak in November last year. It went on to say that trading volumes had generally tracked the bitcoin price.
Bitcoin has had a high correlation with equities since early 2020 and has recently had almost zero correlation with gold, according to the report, noting that the cryptocurrency has been more correlated with media and entertainment stocks in the United States, as both may be driven by similar factors.
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