Bitcoin (BTC) is down 40% since April, and this is no longer due to its correlation with equity markets, Morgan Stanley (MS) said in a May 12 research report.
- "Hyped and leveraged crypto sectors, such as decentralized finance (DeFI) and crypto-backed stablecoins, are experiencing mass liquidations as it becomes increasingly clear that any elevated prices were traded on speculation, with limited genuine user demand," the analysts, led by Sheen Shah, wrote.
- Non-fungible tokens (NFTs) and digital land were the subject of much speculation and inflows, the report said, adding that the reason most people bought these assets was based on the expectation that another buyer would purchase them for a higher dollar price.
- NFTs are digital assets on a blockchain that represent ownership of virtual or physical items and can be sold or traded.
- The bank notes that while crypto markets have been trading poorly since November, they have been shocked in recent days by the collapse of the third-largest stablecoin terraUSD (UST).
- Crypto-backed stablecoins have become an important part of the leverage within the decentralized financial ecosystem (DeFi), the note said, adding that this one event that has led to increased uncertainty and instability has led to a "broader reassessment of where many crypto prices should be trading."
- DeFi is a catch-all term for lending, trading and other financial activities conducted on a blockchain without the use of traditional intermediaries.
- The most speculative and leveraged sectors of the crypto markets are now in focus as interest rates rise globally and the Federal Reserve withdraws liquidity, the note added.
- The massive rise in the market capitalization of stablecoins - a 30-fold increase since the early 2020s - has also had an impact on crypto prices, as stablecoins have been responsible for providing a lot of liquidity and leverage, the bank said.
- Morgan Stanley said its clients are wondering whether the sharp decline in crypto prices and the de-pegging of stablecoins poses a "more systematic risk to the broader financial markets."