Cryptocurrency expert Nicholas Merton of Data Dash Free a sobering perspective on the current state of the crypto market in a recent video. He answered the question every crypto investor faces: When will it be time to buy Bitcoin and other altcoins?
Liquidity: the fundamental driver of price evolution
Merton’s theory is based on a key principle: liquidity. According to him, the fundamental element that drives crypto prices up or down is liquidity in the market, especially the liquidity of stablecoins.
He explained how, in times of increasing stablecoin liquidity, prices in the crypto market tend to rise. Conversely, when stablecoin liquidity begins to stagnate or decline, the market enters a period of stagnation or decline.
“We see that if we look at history, even beyond that, in previous bull markets…we see that there is an increase in Tether as it has become a growing player and tool in the crypto space since 2015,” Merton explained.
An alarming correlation
Interestingly, he observed a strong correlation between stablecoin liquidity and the total crypto industry market capitalization minus Bitcoin. He postulated that more risky games tend to be significantly impacted by changes in stablecoin liquidity.
Now, although Bitcoin and Ethereum are holding up better than most altcoins due to their position and established status in the market, the reality of shrinking liquidity is impossible to ignore. Even if there is enthusiasm for ETH 2.0 and proof-of-stake, or the belief that liquidity is primarily migrating to Bitcoin, the hard truth remains.
Merton points out that fondness for a particular asset or its historical performance does not guarantee future gains. He points to a critical issue facing the crypto market – the stagnant and declining liquidity of stablecoins over the past year. Unless there is a solution that revitalizes the liquidity of stablecoins, the value of cryptocurrencies could remain unchanged or possibly correct lower.
The expert warns that the current landscape is not favorable for the crypto market. Declining stablecoin liquidity, lack of development optimism, shaken investor sentiment, market makers exiting the space, and looming regulatory threats paint a rather bleak picture.