In the Bitcoin and crypto market, stablecoins have emerged as an essential element for liquidity, often referred to as “dry dust”. Stablecoins like Tether (USDT), USD Coin (USDC) and TrueUSD (TUSD) provide a safe haven for investors, allowing them to park funds aside before making strategic moves into BTC and altcoins.
However, recent observations from industry experts and data analysts suggest that the stablecoin’s fuel is running out, raising questions about the upside potential the market is currently offering.
Importance of stable currencies
Stablecoins have gained prominence as one of the most liquid trading pairs alongside Bitcoin on most crypto exchanges. Their high liquidity and stable value make them an attractive choice for investors looking to time their market entry effectively.
According to Ki Young Ju, co-founder and CEO of CryptoQuant, the market cap ratio of stablecoins on exchanges has historically been linked to increases in Bitcoin prices, providing insight into investor sentiment and willingness to allocate funds. Today, you common chart below and tweeted, “stablecoin fuel is running out.”
Yu’s joint chart highlights the intriguing relationship between Bitcoin price movements and the market cap stablecoin ratio against BTC and ETH. During the fall of FTX, investors sought refuge in stablecoins due to falling prices, leading to an increase in the stablecoin ratio against BTC and ETH.
Conversely, the rise in the price of Bitcoin in mid-March was preceded by an increase in the ratio of stablecoins. At first, the stablecoin ratio increased from below 0.2 to above 0.25. By mid-April, the price of BTC hit a temporary high for the year as investors’ stablecoin holdings depleted and the stablecoin ratio fell to 0.15.
The upside potential seems limited for Bitcoin and Altcoins
The most recent example is the mid to late April price hike. The stablecoin ratio experienced slow but steady growth, rising from 0.15 to 0.18. Accumulated dry dust was discharged in the most recent rise in the price of Bitcoin from $27,000 to $31,500.
With the current stablecoin ratio at 0.155, there appears to be limited room for rapid upward price jumps in Bitcoin. New capital in the form of stablecoins must flow into the market to support any significant price movements. You claim, “boring market until more stablecoins are injected for buy-side liquidity”.
Digital asset data provider Kaiko as well pointy there is a worrying trend regarding stablecoin market cap today. The total market capitalization for the top five stablecoins is said to have fallen for five consecutive quarters.
However, it is worth noting that Tether (USDT) and TrueUSD (TUSD) have managed to buck this downward trend.
Additionally, overall market depth in USD terms has only seen a slight increase since Ripple’s decision. Market depth, which measures the amount of bids and asks within 1% of the average price for all order books, provides essential insight into the supply and demand dynamics of cryptocurrencies.
At press time, the price of BTC was $29,269.
Featured image from iStock, chart from TradingView.com