Bitcoin and other altcoins retreated this week amid rising concerns about the industry. Cardano plunged to the lowest level this year while Bitcoin slipped below the important support at $25,000. In all, the total market cap of all cryptocurrencies moved to $1.03 trillion.
Falling money supply and liquidity
A key concern about investors is that money supply is falling in the United States and Europe as the Fed and ECB implement their quantitative tightening (QT) process. QT is a strategy where a central bank works to reduce its balance sheet. The bank has reduced its total assets by more than $1 trillion to $8.20 trillion.
Therefore, liquidity in the market has reduced drastically. For example, the closely watched M2 money supply in the United States has dropped to $20.9 trillion. In Europe, this figure has fallen from over 15.15 trillion euros a year ago to 15.15 trillion. M2 money supply looks at the available deposits for people. It includes cash balances in banks and other liquid assets like retail money market funds.
The money supply issue will likely continue in the coming months as the major central bank maintains interest rates at an elevated level and continues with their QT program.
Therefore, as I wrote here, the upcoming US inflation data from the US will be watched closely. Most economists expect the data to show that the headline CPI rose from 3.2% to 3.4% while core CPI dropped to 4.3%. A higher inflation figure will give the Fed another reason to raise rates.
Liquidity and altcoins
The tightening liquidity and higher yields has implications for altcoins like Ethereum, Solana, BNB Coin, Zilliqa, and Cardano. For one, many investors use leverage or debt to invest in these assets. Now, with the liquidity falling, they have been unable to access these loans.
Most importantly, many people buy these altcoins and use their DeFi ecosystem for staking purposes. Staking is the process of buying and holding a crypto token with the goal of generating a return. Most crypto tokens have staking features, with Ethereum being the most staked product.
The challenge is that the US dollar is now having a higher yield than these coins. For example, the 10-year bond yield in the US has risen to almost 4.50%. Ethereum, on the other hand, has a staking return of less than 2%. Therefore, many people are moving to the safety of the US dollar.
Complicating the situation is that millions of Americans will start paying their student debt at the end of this month. These payments will drain the money supply further in the near term.
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