Tascha explained that institutional money could undergo changes in interest rates/funding cost more quickly, leading to broader reactions in cryptocurrency prices. She explained that the rapid growth of crypto derivatives on centralized exchanges added to new inflows by institutional players.
The US monetary policy influence cryptocurrencies much more than stocks. Many factors seem to have caused this emerging trend, but macroeconomist Tascha Che believes enough concerns might strengthen further market declines.
The tech investor pointed to growing institutional adoption, the massive increase in leverage, and the reliance of crypto on the US dollar.
She had previously said that September would become a busy month for cryptocurrencies and traditional financial markets. The release of US inflation data and the interest hike decision by the Federal Open Market Committee should occur this month. Besides, there will be significant upgrades on the Ethereum and Cardano networks.
Massive Institutional Inflows Influence the Overall Crypto Market
Tascha explained that institutional money could access leverage and undergo changes in interest rates/funding cost more quickly. Therefore, it might lead to broader reactions in the prices of cryptocurrencies and macro environment changes.
She pointed out that mainstream finance had a heavy investment of corporate money. That leads to a more significant spillover from stock markets to cryptocurrencies when macro affects the former. The growing correlation between stocks and crypto assets since 2020 makes that evident.
Morgan Stanley Research considers that inflows from institutional investors rose from zero to more than 70% of the cryptocurrency trading volume between 2018 and 2021. According to quarterly data from Coinbase, that is equivalent to around USD 385 billion, a proxy for the entire crypto market.
Cryptocurrency prices have become more sensitive to US monetary tightening than stocks over the last cycle. In other words, the Federal Reserve (Fed) hurts the cryptocurrency industry much more than stocks when it raises interest rates.
Given the strength of cryptocurrencies as a hedge against volatility and inflation in traditional financial markets, Tascha thinks it is ironic. On the contrary, cryptocurrencies have had a growing correlation with stock markets.
The Increase in Leverage Might Lead to Further Cryptocurrency Volatility
Jerome Powell, the chairman of the Fed, recently said the US economy needed tight monetary policy to control inflation. On her part, Tascha considers that a massive increase in leverage could lead to further volatility for cryptocurrencies.
The macroeconomist explained that the rapid growth of crypto derivatives on centralized exchanges had fueled the demand for leverage. That has added to new inflows into the crypto market, primarily by institutional players.
Several cryptocurrency companies like Celsius and Voyager went broke in early 2022. That situation led some DeFi supporters to claim that over-collateralized and programmable liquidation of loans would be safer for the system.
However, Tascha said DFi might have less exposure to certain risks but would increase others. That would lead to more interconnected protocols, encouraging further overall leverage.
The demand and access to leverage in cryptocurrencies grow due to the entry of institutional players. Besides, higher leverage influences the stock market spillover and the appreciation of the US dollar more profoundly.
Regarding US monetary policy actions, Tascha also discussed the effect of the US dollar on the overall crypto market. She thinks using the fiat currency as the primary funding method and unit of account was a fundamental weakness.
By Alexander Salazar
