Morgan Stanley Says Tightening in the Crypto Market Has Paused

While the market cap of stablecoins, an indicator of crypto liquidity, has stopped falling, demand for leverage has yet to start recovering, the bank said.

AccessTimeIconAug 22, 2022 at 11:24 a.m. UTC
Updated May 11, 2023 at 4:50 p.m. UTC
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Institutional investors have stopped redeeming stablecoins and the coins’ market cap, an indicator of liquidity in the crypto market, has stopped falling. Even so, there appears to be little demand for positions to be rebuilt, Morgan Stanley (MS) said in a research report Friday.

Last week was the first time since April that the market cap of the coins – cryptocurrencies whose value is tied to real-world assets such as gold or national currencies – didn’t drop on a monthly basis, according to the report. While it is still 20% below its peak, this may be a sign that “extreme institutional deleveraging” appears to have paused for now.

With central banks continuing to tighten monetary policy, there isn't much demand to borrow to finance crypto investments, the bank said, noting that lending on decentralized finance (DeFi) platforms is down 70% this year.

DeFi is an umbrella term used for lending, trading and other financial activities carried out on a blockchain without the use of traditional intermediaries.

Morgan Stanley says it will be difficult for this crypto cycle to bottom without “fiat leverage growing or crypto leverage growing.” Demand for leverage in the crypto industry remains subdued, and as ether (ETH) has rallied, margin calls on crypto borrowers have paused, the note said.

The bank notes that redemptions of the stablecoin tether (USDT) have stopped, and its market issuance has actually risen in the last week, increasing $1.7 billion in 10 days.

Conversely, the market cap of USD coin (USDC), the second-largest stablecoin, has dropped $2.6 billion since the start of July. “The fall in USDC market cap started ahead of the regulatory change and looks similar to the decline seen earlier in the year between March and May,” the bank said.


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Will Canny is CoinDesk's finance reporter.

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