Cryptocurrency expert Nicholas Merton of Data Dash offered a sobering perspective on the current state of the crypto market in a recent video. He addressed the question on the mind of every crypto investor: when is it time to buy Bitcoin and other altcoins?
Liquidity: The fundamental driver of price action
Merton’s theory hinges on one key principle: liquidity. According to him, the fundamental element that drives crypto prices higher or lower is liquidity within the market, especially stablecoin liquidity.
He explained how during periods of increasing stablecoin liquidity, prices in the crypto market tend to rise. Conversely, when stablecoin liquidity begins to level off or decline, the market enters a period of stagnation or decline.
“If we look back over history, even after that, in past bull markets, we see an increase in Tether as it became a growing player and tool within the crypto space since 2015,” Merton explained.
An alarming correlation
Interestingly enough, he saw a strong correlation between stablecoin liquidity and the total market capitalization of the crypto industry, minus Bitcoin. He postulated that more risk-on-play is often significantly affected by changes in stablecoin liquidity.
Despite Bitcoin and Ethereum holding up better than most altcoins due to their position and established status within the market, the reality of liquidity shrinkage is impossible to ignore. Even if there is excitement about ETH 2.0 and proof of stake, or the belief that liquidity is mainly migrating to Bitcoin, the hard truth remains.
Merton emphasizes that a person’s predilection for a particular asset or his historical achievements are no guarantee of future profits. He underscores a critical issue facing the crypto market: the stagnant and declining liquidity of stablecoins over the past year. Unless there is a solution that revives stablecoin liquidity, the value of cryptocurrencies could hold or possibly correct downwards.
The expert warns that the current landscape is not favorable for the crypto market. Stablecoin’s declining liquidity, lack of development optimism, shaken investor sentiment, market makers exiting the space, and looming regulatory threats paint a rather grim picture.