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

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% 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 assets’ 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 behaves as an indicator of 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 in 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 in the increased liquidity in the markets reflected in 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 by the stablecoin supply growth can be beneficial for 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 globally by empowering retail users with unbiased, high-quality, and accurate information for drawing their own informed conclusions.

Where to find CoinMarketCap:

Website | Twitter | Telegram | LinkedIn |

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 deliver actionable intelligence for the crypto market. IntoTheBlock also uses machine learning and statistical modeling to deliver actionable intelligence for crypto assets.

Where to find IntoTheBlock:

Website | Twitter | Medium | LinkedIn |

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