“Hyped and leveraged areas of crypto, such as decentralized finance (DeFI) and crypto-backed stablecoins, are seeing mass liquidations, as it is becoming clearer that all the elevated prices were traded on speculation, with limited real user demand,” analysts led by Sheen Shah wrote.

Non-fungible tokens (NFT’s) and digital land have been subject to much speculation and inflows, the report said, adding that the reason most people bought these assets was based on the expectation that another buyer would want to purchase them for a higher price in dollars.

The bank notes that while crypto markets have been trading badly since November, they have been shocked by the collapse of the third largest stablecoin terraUSD (UST) in recent days.

Crypto-backed stablecoins have become an important part of the leverage built within the decentralized finance (DeFi) ecosystem, the note said, adding that this one event which has led to increased uncertainty and instability has resulted in a “broader re-evaluation of where many crypto prices should be trading at.”

DeFi is an umbrella term used for lending, trading and other financial activities, carried out on a blockchain, without thes use of traditional intermediaries.

The most speculative and leveraged areas of crypto markets are now in focus as interest rates rise globally and the Federal Reserve removes liquidity, the note added.

The massive increase in stablecoin market capitalization – a 30 times rise since early 2020 – has had an influence on crypto pricing as well, as stablecoins were responsible for providing much liquidity and leverage, the bank said.

Morgan Stanley says that its clients are asking whether the large fall in crypto prices and the de-pegging of stablecoins poses a “more systematic risk for broader financial markets.”