Morgan Stanley Says There Is Still Much Leverage in the Crypto Ecosystem

The collapse of FTX and Alameda has sparked another round of deleveraging in crypto markets, and that’s likely to spur more “crypto quantitative tightening,” Morgan Stanley (MS) said in a research report Friday.

Creditors are selling digital assets to cover their risks, adding to market volatility, and are likely to reveal their exposures in the next few weeks. The spillover to equity markets so far is limited because crypto firms mainly lend to each other, the report said.

Morgan Stanley says many events have led to the latest bout of volatility in the crypto market, but the key question is “how to value crypto tokens that offer a service but don’t offer the token holder a stake in the company (like equity) or a claim on assets in the case of a default (like debt.)”

In a bull market using such a token as collateral to leverage seems fine, but the strategy is risky in a bear market, the bank added.

The bear market in bitcoin started almost a year ago and it has been mainly institutions who have been selling, the note said. Retail investors are still holding on to their positions.

With bitcoin (BTC) now trading under $18,000, there isn’t a clear technical support level before $12,500, the bank said. It estimates that anyone that bought or received BTC in the past 12-18 months has an average breakeven price of around $45,000.

“Retail investors may start to sell if BTC trades below $10,000,” it added.

Decentralized finance (DeFi) lending is proving to be resilient at the moment, as it was in June following the Terra/LUNA collapse, because it is over collateralized. “CeFi lending is where there were problems,” the note added.

DeFi is an umbrella term for a variety of financial applications carried out on blockchains.

Read more: JPMorgan Sees Wave of Crypto Deleveraging From FTX’s Woes