Crypto Markets Analysis: Stablecoins Trend Lower Despite Bitcoin’s Recent Performance

Bitcoin’s BTC$87,093.75 momentum this year has yet to ignite larger-scale investment in other crypto assets such as stablecoins.

Despite BTC’s 43% rise in 2023 and the 38% gain of ether ETH$2,905.65, a significant amount of capital remains inactive, major stablecoin indicators suggest.

Most notably, the stablecoin supply, which serves as a key mechanism by which many crypto assets are purchased, has been declining. When the stablecoin supply increases, it implies there is more capital to purchase crypto assets. When the supply of stablecoins falls, it implies the opposite.

The aggregate supply net position change of the top four stablecoins (USDT, USDC, BUSD and DAI) has been negative since Sept. 14, and has been trending lower since Feb 7.

For historical context, the aggregate supply net position change for stablecoins was positive between February and March in 2022, reflecting strong demand for digital assets during that time period.

Meanwhile, the stablecoin supply ratio (SSR), another key stablecoin indicator that measures the ratio of bitcoin’s market cap to the market cap of stablecoins, has been increasing, indicating that the buying power of stablecoins has decreased relative to BTC.

The current SSR may indicate an underlying decrease in demand for BTC exists. But a more optimistic interpretation is that capital is sitting on the sidelines to be deployed in some capacity in the near future. While BTC has traded in negative territory in five of the most recent seven days, volume was relatively in line with its 20-day average.

In some cases, BTC trading volume fell below its 20-day average. The same holds true for ETH, which has traded lower recently, but on average to below-average volume. At the moment, BTC and ETH appear to be establishing new levels of support near $23,000 and $1,640, respectively.

The longer that BTC and ETH trade near these ranges, the more confidence investors are likely to have in those levels. The supply of stablecoins may be an important signal to watch and not just an indication of negative sentiment. A shift from where supply currently stands to where it stood between 2020-2022 could indicate a move higher.