Five ETFs with Exposure to Ethereum
IntoTheBlock analyzes how monetary policy and macroeconomic decisions affect crypto-assets’ price performance and stablecoins.
The beginning of 2023 saw a significant increase in the value of cryptocurrencies across the market. Bitcoin is up 39% so far in January, which would make it the biggest monthly gain since October 2021. Many attribute this recent price increase to the liquidity influx recently experienced in the US markets. Crypto sectors such as stablecoins have begun to reflect similar positive trends in their total supply. This article seeks to analyze the recent increase in liquidity and its relationship to crypto-asset price performance and increase in stablecoin supply.
After moving in different directions during the FTX crash, crypto and stocks have resumed moving in a similar pattern. Currently, the correlation between the Nasdaq and Bitcoin is very strong as indicated by their correlation coefficient of 0.93, suggesting a strong positive statistical pattern between the two.
Source: IntoTheBlock’s Capital Markets Insights
This general market increase is directly correlated with the recent reverse repo and US Treasury General Account balance. As inflation began to decline, markets generally climbed in anticipation of a possible change in Federal Reserve policy. Although the Federal Reserve has not yet officially announced any plans to ease financial conditions, investors may be anticipating such a move, as they have observed that increasing the money supply in the past leads to an increase in the value of financial assets .
The relationship between the Fed’s actions on liquidity and the market’s movements can be directly correlated. Bitcoin even sometimes acts as an indicator of changes in liquidity. This pattern is noticeable during May and November 2021, which turned out to be local peaks during the Fed’s positive guidance.
Via TradingView uses Arthur Hayes’ suggested 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 easing (QT) that involved cutting $458 billion in assets from its balance sheet. This led to a decrease in the overall liquidity available in markets, causing prices to fall. This change in attitude has been directly felt several times in the behavior of cryptoassets, most recently the increase in liquidity can be noticed by different sectors.
The increased liquidity in the market has started to affect the supply 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 to the crypto-ecosystem in a few ways: it can increase liquidity, make trading more accessible, promote greater adoption, improve market stability, and increase the efficiency of the ecosystem in general. This recent increase in stablecoins market capitalization 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 such as cryptocurrencies that are more sensitive to these changes in monetary policy. Furthermore, the recent action is directly felt in the increased liquidity in the markets which is reflected in the stablecoins supply growth.
The relevance of monetary policy and macroeconomic decisions continues to play an important role in crypto-assets’ price performance. Jerome Powell intends to continue to take the necessary measures to bring inflation under control. These monetary policy actions affect the crypto and capital markets through their impact on liquidity. Additionally, the effects of the stablecoin supply growth can be beneficial to the crypto ecosystem by increasing liquidity, making trading more accessible, increasing adoption, and improving market stability.
This is a guest post from CoinMarketCap 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 rapidly growing cryptocurrency space. Its mission is to make crypto discoverable and efficient worldwide by empowering 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 the latest research in AI to deliver actionable intelligence for the crypto market. IntoTheBlock also uses machine learning and statistical modeling to deliver actionable intelligence for crypto assets.
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