Bitcoin (BTC) has dropped 40% since April, and this is no longer due to its correlation with equity markets, according to Morgan Stanley (MS) in a May 12 research report.
Hyped and leveraged areas of crypto, such as decentralized finance (DeFi) and crypto-backed stablecoins, are seeing mass liquidations, as it becomes clear that all the elevated prices were traded on hypothesis, with the finite real user request, analysts led by Sheena Shah wrote.
According to the report, non-fungible tokens (NFTs) and digital land have seen a lot of speculation and inflows, and most people bought these assets with the expectation that another buyer would want to procure them expensively in dollars.
NFTs are blockchain-based digital assets that represent ownership of virtual or physical items and can be sold or traded.
While crypto markets have been trading poorly since November, the bank notes that the recent collapse of the third largest stablecoin, terraUSD (UST), has surprised them.
According to the note, crypto-backed stablecoins have become an important part of the leverage built within the DeFi ecosystem, and this one event has resulted in elevated ambiguity and instability, resulting in a larger re-assessing of where numerous crypto prices should be trading at.
DeFi is an umbrella term for lending, trading, and other financial transactions conducted on a blockchain without the use of traditional intermediaries.
The most speculative and leveraged areas of crypto markets are now under scrutiny as interest rates rise globally and the Federal Reserve of the United States withdraws liquidity, according to the note.
The massive increase in stablecoin market capitalization – a thirtyfold increase since early 2020 – has also had an impact on crypto pricing, as stablecoins provided much liquidity and leverage, according to the bank in the note.
According to Morgan Stanley, its clients are wondering if the sharp drop in crypto prices and the depegging of stablecoins pose a “more systematic risk for broader financial markets.”
