Analysts at Morgan Stanley say that the underlying reason for the recent slump in the crypto market is that the Federal Reserve has embarked on aggressive monetary tightening. According to experts, ultra-loose monetary policy and massive stimulus measures adopted as an emergency relief program set the stage for the stunning rally of digital tokens. To sum up, low interest rates, expansion of central bank balance sheets, and government stimulus were all “drivers of exponential cryptocurrency price rises” throughout 2020 and 2021, Morgan Stanley pointed out in a research note. Leveraged crypto markets are now weakening as the US Federal Reserve and other central banks aim to scale back their balance sheets. Therefore, they prepare global investors for higher interest rates.  

Pondering over the direct correlation between monetary policy and bitcoin’s dynamic, analysts at Morgan Stanley found out that bitcoin’s market capitalization tracked the growth of global money supply. The annual increase in M1 money supply peaked in February 2021, while bitcoin’s annual growth rate topped out a month later in mid-March. The bank experts view this as no coincidence. Bitcoin, other cryptocurrencies, and other highly risky assets benefited from huge liquidity injections by major central banks and the policy of low interest rates.