Morgan Stanley Notices ‘Crypto Equivalent of Quantitative Tightening’

The “crypto equivalent of quantitative tightening” is upon us, Morgan Stanley said in a report on Tuesday, reported by CoinDesk. The report pointed to a weakness in crypto markets, the failure of the former third-largest stablecoin and a reduction in leverage in decentralized finance (DeFi). 

The “quantitative tightening” primarily started as a result of the collapse of TerraUSD (UST), which is now known as TerraClassicUSD (USTC). UST, at the time, dropped catastrophically from its $1 peg to $0.10 in the course of three days. Now the newly named, but same coin, USTC, is valued at $0.0145, according to Bitpush Terminal data. 

This devastating decline has caused some to question the stability of stablecoins and withdraw their money from these digital assets. According to the report, investors are redeeming USDT, the third-largest crypto currency by market cap and the most heavily traded digital asset on a daily basis, at a record pace. 

It also noted that about $10.6 billion in redemptions have happened in the last month, while other stablecoin acceptance has not risen. This has led to the “crypto equivalent of quantitative tightening” as Morgan Stanley put it. This is because the total stablecoin market cap has decreased and liquidity on decentralized exchanges and leverage on lending platforms has declined at an even faster rate. 

Of the $10 billion redeemed, $5.9 billion was done so on the TRON blockchain, with much less taking place on the Ethereum blockchain. The report noted that Binance, FTX and Bitfinex were the three largest redeemers of USDT. 

The Morgan Stanley report concluded, suggesting that “systemic spillover” from the crypto markets into the fiat banking system appears to be limited. However, they did note that if USDT falls under its $1 peg, it could affect risk markets. 

This report from Morgan Stanley also describes the sentiment Bank of America (BofA) had when they released a note in February titled Digital Assets: in the flow, by Alkesh Shah, a global crypto and digital asset strategist, which he argued that tightening by the U.S. Federal Reserve will likely limit upside for cryptocurrencies over the next six months. While we haven’t fully lived out the full six month hypothesized by Shah, it is clear that investors and institutional capital remain skeptical on crypto. 

However, these thoughts on crypto by both Morgan Stanley and BofA are not shared by JP Morgan strategists led by Nikolaos Panigirtzoglou who said in a client note last month that digital assets have replaced real estate as their preferred alternative asset class, despite UST’s collapse. In fact, they believe that the collapse helped reprice the crypto market which is something that hasn’t really happened to private equity, private debt and real estate.

Author: Tyler Irvin

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