The relation between the supply of stablecoins and the price of Bitcoin is closely interlinked – A surge in stablecoin supply often results in a corresponding increase in Bitcoin’s price. For example, during the ‘Trump Pump’ in the last quarter of the previous year, the supply of stablecoins surged by 16.9%, reaching $188.82 billion, while the price of Bitcoin [BTC] climbed from $67.8k to $106.1k. This demonstrated how liquidity can drive momentum in the crypto market.
However, the current scenario indicates a shift. The inflow of liquidity is slowing down, signaling a sense of hesitation among investors. With another potential ‘Trump Pump’ around the corner, is the high-risk, high-reward nature of digital assets losing its appeal?
Transition towards Cautious Market Behavior
The recent increase in Bitcoin’s price from $91k to $97k (at the time of this writing) – a 6.6% rise in just a week – suggests that traders are preparing for a possible upcoming price surge. Interestingly, Tether USD (ERC20) stablecoins witnessed inflows of $311.5 million during the same period.
This observation supports the hypothesis of CryptoCrypto – when liquidity levels rise, investors tend to exhibit more confidence and increase their investments.
Nonetheless, this is only the beginning. The current inflow of stablecoins pales in comparison to the massive $2.15 billion influx experienced on Election Day last year, marking the highest inflow of the year. This resulted in a significant 8.24% surge in BTC’s price within a single day, surpassing the $70k mark for the first time in eight months.
Following the ‘Trump pump’, a staggering $27.35 billion in stablecoins streamed into exchanges over two months, propelling BTC’s price by 56.5% to $106.5k. The last quarter of last year truly shattered the perception of stablecoins as a ‘safe haven’ asset.
Since then, numerous factors including clashes with the Fed, elevated inflation rates, and mounting selling pressure have had an impact. Open Interest (OI) dropped from $68 billion to $61 billion, and the market cap of stablecoins only experienced a minimal change of +0.56% over the past 30 days.
Despite these challenges, there is a glimmer of hope. The current restricted liquidity may pave the way for enhanced market stability. Coupled with the decline in Open Interest (OI), it indicates that investors are exercising greater caution, reducing speculative bets on BTC’s future. This suggests a maturation of the market as participants weigh risks more thoughtfully.
Can Bitcoin Outperform Stablecoins?
From a mathematical perspective, a surge of 56.5% akin to the ‘Trump pump’ could potentially push Bitcoin beyond $140k by Q1, with $90k serving as a robust support level. Encouragingly, the recent trend of positive net flows of stablecoins over the past three days has ignited a rally, steering the market towards positive territory.
However, it’s essential to maintain a realistic perspective – an ambitious 50% rally still poses challenges. With 88% of Bitcoin’s supply held by retail investors, their ensuing actions could be pivotal in propelling BTC towards its Q1 target. Therefore, the ultimate game-changer would be a surge in stablecoin inflows exceeding the billion-dollar mark, a substantial leap from the current 130 million influx.
Although a breakout past $100k in the short term appears probable, the ability to sustain these levels remains uncertain. Hence, keeping a close watch on stablecoin trends is imperative, as even slight fluctuations could swiftly reverse the market sentiment.