Low interest rates, expansion of central bank balance sheets, and government stimulus were all “drivers of exponential cryptocurrency price rises” in the last two years, Morgan Stanley said in a research note.
Leveraged crypto markets are now weakening as the U.S. Federal Reserve and other central banks look to slow their balance sheet expansion and prepare the markets for interest rate hikes, the bank’s head of cryptocurrency research, Sheena Shah, wrote in a report published last week.
Retail investor sentiment on social media has also started to turn less bullish since late last year with the recent downward price momentum also contributing to the bearish sentiment, the bank said.
Morgan Stanley notes that bitcoin’s market capitalization has tracked the growth of global money supply since late 2013.
The yearly change in money supply peaked in February 2021, while bitcoin’s annual growth rate topped out a month later in March, which the bank sees as no coincidence.
Cryptocurrency’s usage as a payment vehicle/exchange of value is what should drive its valuation in the long run. However, the market has been trading most cryptocurrencies like speculative risk assets, as evidenced by the correlation between bitcoin and equity markets in the last six months, the report said.
Blockchain analytics firm IntoTheBlock said last week that bitcoin’s correlation with M1 money supply has risen to 0.77, suggesting a strong statistical relationship between the two.