Morgan Stanley Says Stablecoin Market Cap Is Contracting Again

The combined market capitalization of the two largest stablecoins, tether (USDT) and USD Coin (USDC), has begun to fall again, a sign that quantitative tightening in the crypto financial system has resumed, Morgan Stanley (MS) said in a research report Tuesday.

The decline in market cap of the two stablecoins, which paused in mid-August, has resumed, the report said. The market cap is now about 10% lower than its April peak.

Availability and demand for stablecoins is an indicator of cryptocurrency market liquidity and the demand for leverage, the bank said. When market capitalization falls it is the crypto equivalent of quantitative tightening. A stablecoin is a type of cryptocurrency whose value is pegged to another asset, such as the U.S. dollar or gold.

The bank notes that changes in USDC’s market capitalization appear to be leading bitcoin’s (BTC) price by two months, and says this may be because the stablecoin is used by crypto institutions for borrowing to buy other coins.

Morgan Stanley says it has seen little evidence of leverage building up again in the decentralized finance (DeFi) ecosystem. DeFi is an umbrella term used for lending, trading and other financial activities carried out on a blockchain without the use of traditional intermediaries.

The crypto market remains highly responsive to expectations for central bank tightening, in particular the actions of the U.S. Federal Reserve, the note added.

Read more: Morgan Stanley Says Tightening in the Crypto Market Has Paused

Source