• Morgan Stanley said that the drop in the crypto market cap of stablecoins hints at quantitative tightening.
• This could put further selling pressure on cryptocurrencies going forward.

Banking giant Morgan Stanley has recently raised a red flag for the crypto market. As per the bank, the combined market cap of the two largest stablecoins – Tether (USDT) and Circle’s USD Coin (USDC) – has started to drop. Stablecoins are those cryptocurrencies pegged to a particular currency such as the U.S. Dollar.

In its research report, Morgan Stanley said that this is a sign of quantitative tightening happening in the crypto financial system. The report added that the decline in the market cap of the two stablecoins, which paused momentarily in mid-August, has resumed once again. From its peak in mid-April, the combined market cap of these two stablecoins is 10 percent lower.

The banking giant added that the availability and demand for stablecoins is an indicator of available liquidity in the crypto market as well as the persistent demand for leverage. The fall in the market cap represents the quantitative tightening in the crypto space.

Related: Investing in Ethereum carries greater risk than Bitcoin and other altcoins: Morgan Stanley

The change in the bank notes in USDC’s market capitalization is currently leading Bitcoin’s price by two months. As per Morgan Stanley, this could be because the crypto institutions use this stablecoin for borrowing to buy other coins.

“The fall in USDC market cap started ahead of the regulatory change and looks similar to the decline seen earlier in the year between March and May,” the bank said.

Little evidence of leverage building in DeFi

Banking giant Morgan Stanley said that it has seen very little evidence of leverage building up again in the decentralized finance (DeFi) ecosystem. DeFi is the benchmark for lending, trading and other financial activities carried out on the blockchain without using any traditional intermediaries.

The bank also said that the crypto market remains highly responsive to the upcoming central bank tightening. Last week, during the Jackson Hole meeting, Federal Reserve chairman Jerome Powell said that they would not be shying away from increasing interest rates to control the soaring inflation. The Fed chairman added:

While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.

These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Soon after Powell’s comments, the crypto market came under severe selling pressure over the last week. With the Fed tightening measures, money could be moving out of the risk assets.

As a result, cryptocurrencies could likely continue to stay under pressure going ahead.