Morgan Stanley says that the fact that fewer stablecoins are being made is a bad sign for trading in cryptocurrencies. The report said that regulation in the U.S. is likely to focus on stablecoins.
Morgan Stanley (MS) said in a research report on Monday that stablecoins are an important part of crypto trading and that their products could compete with the fiat banking system.
The bank says that U.S. regulators have started putting limits on stablecoin products and that the issuance of stablecoins is important for crypto traders. According to the report, falling stablecoin market capitalization indicates that cryptocurrency liquidity and leverage are decreasing, indicating that the cryptocurrency market is quantitatively tightening.
Stablecoins are a type of cryptocurrency whose value is tied to another asset, like the U.S. dollar or gold.
Morgan Stanley says that the value of the stablecoin market started to go down around the same time that the Federal Reserve balance sheet started to go down.
During the bull market in cryptocurrencies in 2021, the price of bitcoin (BTC) led the growth in stablecoin market capitalization. During the bear market in 2022, the opposite was true.
Analysts Sheena Shah and Kinji Steimetz wrote that rising market prices led traders to use more leverage by borrowing stablecoins, which they then used to buy more crypto. “The drop in market prices was caused by a drop in crypto liquidity, which was caused by traders closing long crypto positions and then selling the stablecoin they had bought.”
The bank thinks that the U.S. will focus on regulating stablecoins and that issuers will probably have to register and show that they have enough liquid assets to back the stablecoins they issue.
“All stablecoins depend on the market believing that the system can keep its value stable,” the note said.
