IntoTheBlock analyzes how monetary policy and macroeconomic decisions affect the price development of crypto assets and stablecoins.
At the beginning of 2023, the value of cryptocurrencies increased significantly across the market. Bitcoin is up 39% so far in January, which would make it its biggest monthly gain since October 2021. Many are attributing this recent price rally to the influx of liquidity that has recently been seen in US markets. Crypto sectors like stablecoins have started to reflect similar positive trends across their overall supply. This article attempts to analyze the recent surge in liquidity and its relationship to crypto asset price action and the surge in stablecoin supply.
After moving in different directions during the FTX collapse, crypto and stocks have started moving in a similar pattern again. Currently, the correlation between Nasdaq and Bitcoin is very strong as evidenced by their correlation coefficient of 0.93, indicating a strong positive statistical pattern between the two.
Source: Capital Markets Insights by IntoTheBlock
This general market rise directly correlates to the recent decline in reverse repo and US Treasury General account balances. As inflation began to fall, markets in general have rallied on anticipation of a possible change in Federal Reserve policy. While the US Federal Reserve has not yet officially announced any plans to ease financial conditions, investors may be anticipating such a move, having observed that monetary expansion has historically led to appreciation in the value of financial assets.
The relationship between Fed liquidity actions and market movements can be directly correlated. Bitcoin sometimes even acts like an indicator of changes in liquidity. This pattern is noticeable in May and November 2021, which turned out to be local highs during the Fed’s upbeat outlook.
Via TradingView using the liquidity index proposed by Arthur Hayes
In 2020 and 2021, the Federal Reserve implemented quantitative easing (QE) that resulted in a significant expansion of its balance sheet and supported markets, including the cryptocurrency market. In 2022, the Federal Reserve undertook quantitative tightening (QT) that involved the reduction of $458 billion worth of assets from its balance sheet. This caused the overall liquidity available in the markets to decrease, causing prices to fall. This shift in attitude has been directly felt in the behavior of crypto assets on multiple occasions, most recently the increase in liquidity by various sectors.
The increased liquidity in the market has started to impact the available supply of stablecoins in the ecosystem. This growth bodes well for the entire crypto ecosystem.
Source: USDT, USDC, and DAI MarketCap Indicators by IntoTheBlock
The growth in stablecoin supply can be beneficial to the crypto ecosystem in a number of ways: it can increase liquidity, make trading more accessible, encourage greater adoption, improve market stability, and increase the overall efficiency of the ecosystem. This recent spike in stablecoin market cap may be directly related to increased liquidity in the market. Quantitative easing can have a positive impact on risky assets like stocks, high yield bonds and other assets like cryptocurrencies that are more sensitive to these changes in monetary policy. In addition, the recent actions are directly reflected in the increased liquidity in the markets, which is reflected in the growth in the supply of stablecoins.
The relevance of monetary policy and macroeconomic decisions continues to play an important role in the price development of crypto assets. Jerome Powell wants to continue to take the necessary measures to bring inflation under control. These monetary policy measures are affecting the crypto and capital markets through their impact on liquidity. Additionally, the impact of the growth in stablecoin supply may be beneficial to the crypto ecosystem by increasing liquidity, making trading more accessible, increasing adoption and improving market stability.
This is a CoinMarketCap guest post by Pedro Negron of IntoTheBlock and has been edited for style. The original article was published here.
What is CoinMarketCap:
CoinMarketCap is the world’s most referenced price tracking website for digital assets in the fast-growing cryptocurrency space. Its mission is to make crypto discoverable and efficient worldwide by providing retail users with unbiased, high quality and accurate information to make their own informed conclusions.
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What is IntoTheBlock:
IntoTheBlock is blockchain and cryptocurrency market analysis, insights and trading signals. The company uses data science to apply cutting-edge research in AI to provide actionable intelligence for the crypto market. IntoTheBlock also uses machine learning and statistical modeling to provide actionable intelligence for crypto assets.
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