Low interest rates, expanding central bank balance sheets and government stimulus were “drivers of exponential cryptocurrency price increases” over the past two years, Morgan Stanley said in a research note.
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Leveraged crypto markets are now weakening as the US Federal Reserve and other central banks seek to slow their balance sheet expansion and prepare markets for interest rate hikes, the bank’s head of cryptocurrency research wrote. , Sheena Shah, in a report published last week.
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Retail investor sentiment on social media has also started to turn less bullish since late last year, with recent downward price momentum also contributing to bearish sentiment, the bank said.
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Morgan Stanley notes that bitcoin’s market capitalization has tracked the growth of the global money supply since the end of 2013.
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The annual change in the money supply peaked in February 2021, while bitcoin’s annual growth rate peaked a month later in March, which the bank considers to be no coincidence.
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The use of cryptocurrencies as a payment/value exchange vehicle is what should drive their valuation in the long run. However, the market has been trading most cryptocurrencies as speculative risk assets, as evidenced by the correlation between bitcoin and equity markets over the past six months, according to the report.
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Blockchain analytics firm IntoTheBlock said last week that bitcoin’s correlation with the M1 money supply has risen to 0.77, suggesting a strong statistical relationship between the two.
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