Why A Drop In Stablecoin Market Cap Is A Bad Sign For Crypto, According To Morgan Stanley

According to researchers at the U.S. investment firm Morgan Stanley, stablecoin instruments may be able to compete with conventional banking systems, and its dropping market capitalization signals a decrease in cryptocurrency liquidity and leverage.

The bank has issued a warning to cryptocurrency investors, stating that decreased issuance of these asset types will likely have a detrimental influence on crypto trading in the future.

According to the research’s findings, a decline in the market value of stablecoins is indicative of inadequate cryptocurrency liquidity and leverage. For the bitcoin market, this corresponds to quantitative tightening.

Stablecoin Market Cap Growing 

According to data from CoinCodex, the market capitalization of the stablecoins sector is $137.53 billion, or almost 13% of the overall market capitalization of cryptocurrencies. The stablecoins market had a trading volume of $134.38 billion in the previous day.

Stablecoins are a type of digital currency designed to have a stable value, typically tethered to the US dollar. Stablecoins strive to keep a constant value over time, as opposed to other cryptocurrencies such as Bitcoin, whose value can be very volatile and change frequently.

Stablecoins accomplish this stability by being backed by traditional currency, commodities, or other cryptocurrencies. Consequently, the value of a stablecoin is typically pegged to the value of the underlying asset.

Image: LifeHacker

The SEC Clampdown

The ongoing crackdown by regulators such as the U.S. Securities and Exchange Commission to prohibit the issue of new stablecoins is anticipated to drive down the prices of cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH).

Gary Gensler, chairman of the SEC, has warned of the need for additional regulation in the cryptocurrency industry, stating in media interviews that “the runway is getting awfully short. And we’re here to try to protect the investing public.”

Pros & Cons

Stablecoins have the potential to offer considerable advantages over traditional fiat currencies and other cryptocurrencies, according to popular perception. Stablecoins can promote faster, less expensive, and more secure transactions, especially for international transactions.

Image: MyLO

Concerns exist, however, regarding the possible hazards linked with stablecoins. One of the primary dangers is that the collateral backing these type of assets may not be sufficient or liquid enough to keep the coin’s value sustainable.

There are also fears that stablecoins could be utilized by criminal organizations who engage in the movement of dirty money and funding of terror activities.

As stablecoins gain popularity, there is a growing consensus among authorities that they should be subject to the same oversight as conventional financial products.

Others worry that excessive regulation could hinder innovation and limit the potential benefits of stablecoins.

Crypto total market cap at $982 billion on the daily chart | Chart: TradingView.com

Regulatory Requirement

Morgan Stanley said that the US government is starting to control stablecoins, and they think that the government will focus on making rules for stablecoin regulation.

The companies that create stablecoins will have to sign up and show that they have enough money to support the stablecoins they make, the bank pointed out.

Morgan Stanley’s Stance On Crypto

Morgan Stanley’s view on cryptocurrencies is lukewarm. They are researching methods to offer clients exposure to it through financial products, but some executives are wary of its long-term prospects and inherent worth.

The bank is cautiously bullish about the potential of cryptocurrencies, but is aware of the associated dangers and difficulties.

-Featured image from Paratic