climbed nearly 25% in July, but investors are unlikely to see a repeat of those gains in August. Digital assets continue to trade sideways and Bitcoin, the largest crypto, does not appear to break out of the $20,000-$24,000 range.
With Bitcoin still trading less than a third off its all-time high of nearly $69,000, reached in November 2021, optimistic cryptocurrency holders will likely continue to hope for something to drive token prices higher. There are at least five trends investors should watch, according to Sheena Shah and Kinji Steimetz, analysts at Morgan Stanley.
One trend, the crypto equivalent of quantitative tightening, is the declining availability of stablecoins like Tether’s
and the circle
the analysts wrote in a note Friday. Stablecoins are at the heart of the crypto world, forming the foundation for trading and lending activities, and their availability is a key sign of both crypto liquidity and demand for leverage, or money borrowed for trade.
According to Shah and Steimetz, changes in the market capitalization of stablecoins — a measure of the amount in circulation since each coin is believed to be worth one dollar — could be a leading indicator for Bitcoin prices. In June, Tether’s market capitalization fell 20% in about a month, while Bitcoin fell 45% over the same period to below $30,000.
“This week marked the first time since April that stablecoin market capitalization stopped falling on a monthly basis,” analysts at Morgan Stanley said. “This may be a sign that extreme institutional deleveraging seems to have stopped for now.”
A widespread halt to crypto deleveraging could signal that the worst of the recent market turmoil has passed, paving the way for institutions and other influential traders to become bullish on Bitcoin again.
This is why the evolution of the demand for leverage in crypto, also indicated by the market capitalization of stablecoins, is the second trend to watch. If the demand for leverage in crypto increases, prompting people to move dollars into stablecoins, stablecoin market caps will likely increase. This could mark a bullish turning point, as leverage exacerbates price swings and increases the prospect that gains from strong rallies would be augmented.
However, “there doesn’t appear to be a huge demand for re-leveraging in the crypto world right now: lending on decentralized finance (DeFi) platforms is still down 70% this year,” Shah and Steimetz. “In our view, it will be difficult for this crypto cycle to bottom without fiat leverage developing or crypto leverage developing.”
The third trend to watch relates to the market caps of stablecoins relative to each other, specifically fluctuations in the relationship between the amount of USDT issued and USDC, the most influential stablecoins pegged to the dollar. American and the third and fourth most important digital tokens.
Typically, USDT and USDC market caps move in opposite directions – i.e. traders generally seem to alternate between one and the other – and Morgan Stanley sees a connection between periods when the total value of USDC increases and subsequent gains in Bitcoin prices.
“General USDC market cap growth trends appear to be driving Bitcoin price growth around two months out,” the Morgan Stanley team said, noting that “of course, we cannot use this as a trading signal as the historical relationship is volatile, has outliers (Bitcoin rally in June) and not a long history.
Nevertheless, it is a convincing flag. Tether’s market cap fell $9 billion in a week in early May from $83 billion to $74 billion, while USDC’s market cap fell from $48 billion to $74 billion. $52 billion over the same period. Two months later, in July, Bitcoin recorded its best month of the year.
Now that trend appears to be reversing, with USDC circulation now down nearly $4 billion from its July peak, while USDT issuance has increased. If the pattern holds, it could be negative for Bitcoin.
Ultimately, however, the macroeconomic situation is what matters, according to Morgan Stanley. While Bitcoin and its peers should, in theory, be uncorrelated to traditional finance, they have been found to be largely tied to other risk-sensitive bets, such as tech stocks. Much of the gains in tech and crypto stocks in recent years can be attributed to dovish central bank policy that has injected liquidity into global markets.
“Since 2013, Bitcoin market capitalization growth has generally followed the growth of the global fiat M2 money supply. When central banks eased and injected liquidity, that liquidity ended up in risky assets, including crypto,” the analysts said. “We are waiting [Bitcoin’s] the correlation with equity markets remains high.
Expectations of future money supply growth, which are a function of the size of the Federal Reserve balance sheet and interest rates, are likely the most dominant force on Bitcoin prices, according to Morgan Stanley.
“Near-term crypto markets will therefore focus on inflation expectations and market prices for rate hikes,” Shah and Steimetz said.
The central bank has tightened monetary policy aggressively and raised interest rates as it battles the highest inflation in four decades, a path it is unlikely to deviate from until 2023 at the earliest. This is why inflation and the Fed’s monetary policy plans are the fourth and fifth factors investors should watch for Bitcoin’s next move.
The next few days could bring more clarity for the market.
The Fed’s preferred measure of inflation is due Friday in the form of the July Personal Consumption Expenditure Core Index. Also on Friday, Fed Chairman Jerome Powell is scheduled to speak at the Jackson Hole economic conference, which is likely to be key in clarifying investor expectations for Fed policy.
These events will undoubtedly be one of the most important near-term catalysts for crypto in the coming week, not to mention inflation and rate expectations in the months ahead. Just like in stocks, crypto investors can’t fight the Fed.
Write to Jack Denton at [email protected]