Analysis of Market Liquidity and its Effect on Crypto Asset’s Price and Stablecoin Supply: IntoTheBlock
CMC Research

Analysis of Market Liquidity and its Effect on Crypto Asset’s Price and Stablecoin Supply: IntoTheBlock

Created 1yr ago, last updated 1yr ago

IntoTheBlock analyzes how monetary policy and macroeconomic decisions affects crypto assets price performance and stablecoins.

Analysis of Market Liquidity and its Effect on Crypto Asset’s Price and Stablecoin Supply: IntoTheBlock

The beginning of 2023 saw a significant increase in the value of cryptocurrencies across the market. Bitcoin is up 39% thus far in January, which would make it the largest monthly gain since October 2021. Many are attributing this recent price rally to the liquidity influx recently experienced in the United States markets. Crypto sectors like stablecoins have started to reflect similar positive trends in their total supply. This article seeks to analyze the recent increase in liquidity and its relation with crypto asset’s price performance and increase in stablecoin supply.

After moving in different directions during the FTX collapse, crypto and stocks have again begun to move in a similar pattern. Currently, the correlation between the Nasdaq and Bitcoin is very strong as indicated by their correlation coefficient of 0.93, which suggests a strong positive statistical pattern between the two.

Source: IntoTheBlock’s Capital Markets Insights

This general market increase is directly correlated to the recent Reverse Repo and US Treasury General Account balance decrease. As inflation starts to decrease, markets have generally climbed in anticipation of a possible change in the Federal Reserve's policy. Even though the Federal Reserve has not yet officially announced any plans to loosen financial conditions, investors may be anticipating such a move, as they have observed that increasing the money supply leads to an increase in the value of financial assets in the past.

The relationship between the Fed's actions on liquidity and the market's movements can be directly correlated. Bitcoin even sometimes behaving as an indicator for changes in liquidity. This pattern is noticeable during May and November 2021, which turned out to be local tops during Fed’s positive guidance.

Via TradingView using Arthur Hayes' proposed liquidity index

During 2020 and 2021, the Federal Reserve engaged in quantitative easing (QE) which led to a significant expansion of its balance sheet and supported markets, including the cryptocurrency market. In 2022, the Federal Reserve engaged in quantitative tightening (QT) which involved the reduction of $458 billion worth of assets from its balance sheet. This led to a decrease in the overall liquidity available in markets, causing prices to fall. This change in stance has been directly felt several times on crypto assets behavior, most recently the increase in liquidity can be noticed through different sectors.

The increased liquidity in the market has started to impact the supply available of stablecoins in the ecosystem. This growth represents a positive sign for the entire crypto ecosystem.

Source: IntoTheBlock’s USDT, USDC and DAI MarketCap Indicators

The growth of stablecoin supply can be beneficial for the crypto ecosystem in a few ways: it can increase liquidity, make trading more accessible, foment greater adoption, improve market stability and increase the efficiency of the ecosystem overall. This recent increase in stablecoins market cap can be directly related to the increased liquidity in the market. Quantitative easing can have a positive effect on risky assets such as stocks, high yield bonds, and other assets like cryptocurrencies which are more sensitive to these changes in monetary policy. Furthermore, the recent actions are directly felt on the increased liquidity in the markets reflected on the stablecoins supply growth.

The relevance of monetary policy and macroeconomic decisions has continued to play an important role in crypto assets price performance. Jerome Powell aims to keep taking the necessary measures in order to bring inflation under control. These monetary policy actions affect the crypto and capital markets through their impact on liquidity. Moreover, the effects brought to the stablecoin supply growth can be beneficial for the crypto ecosystem by increasing liquidity, making trading more accessible, increasing adoption and improving market stability.

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