More than $1 billion is currently parked in two major stablecoins, Tether (USDT) and USD Coin (USDC), as investors wait for a better time to invest in crypto assets.
What does it mean that investors are moving out of Bitcoin and into stablecoins? Over the short term at least, this is not a bullish sign. As of March 3, there was just $400 million in USDT and USDC on exchanges. In less than four weeks, the total balance has surged by 150%.
“USDT [and] USDC stablecoin balances in exchanges have crossed $1B. It is a measure of how much money is sitting on the sidelines or placed in limit orders at exchanges, waiting for the perfect moment to buy,” TokenAnalyst research lead Ankit Chiplunkar said.
Over the long term, however, more than a billion dollars sitting on the sidelines in stablecoins could be a good sign for crypto’s eventual recovery. Parking money in stablecoins, after all, is more bullish than pulling money out of the market entirely. The stablecoin data suggests that investors are preparing to return their funds to the crypto market when it stabilizes, and are perhaps waiting for a Bitcoin price drop before making their move.
Demand for Stablecoins, Declining Volume Point to Lack of Buyers
The Bitcoin price has nearly doubled since dropping to $3,600 in one of the steepest falls in its 11-year history. That might suggest the market is rebounding. But it’s too early to celebrate, as other data suggests there probably aren’t enough buyers to drive a sustained rally.
Specifically, we can look at futures exchange and spot exchange volumes. Futures exchange volume refers to the daily volume from futures trading platforms such as OKEx, Huobi, Binance Futures, BitMEX, FTX, and Bybit. These exchanges allow users to trade with leverage or with borrowed capital with added risk. Spot exchange volume comes from exchanges that primarily handle fiat-to-crypto and stablecoin-to-crypto trading pairs. Binance, Coinbase, Kraken, Bitstamp, and Bitfinex account for 83% of the daily spot market volume, which is estimated at $1.3 billion as of this writing.
Volume on both futures and spot exchanges have been relatively stagnant since mid-February. This shows that buying demand for both large- and small-market-cap crypto assets has not increased over the past two months. Despite the rising price of Bitcoin, this data suggests that there is no real increase in buyers in the market to lead an extended rally for crypto assets.
In technical analysis, an increase in the price of an asset that is not supplemented with rising volume is considered as a weak rally or a fake-out that is often followed up with a severe correction.
The uncertainty around the global stock market and general lack of appetite for high-risk assets could lead to a longer period of consolidation for crypto assets.
Why Investors Expect the Crypto Market to Drop in the Short-Term
Historically speaking, when Bitcoin drops, it tends to stay down for a while. In December 2018, for instance, when the price of Bitcoin dropped to as low as $3,150 across major exchanges, it took more than four months for BTC to cleanly break out of the $3,000 to $4,000 range.
Bitcoin’s price has recently been on the rebound. But there is the potential for an ongoing “delayed supply” in mining. This happens when miners sell more Bitcoin than they mine. When Bitcoin’s price drops significantly below the breakeven price of mining, miners are pressured to sell their existing inventory of tokens to make up for their costs. The recent drop in price hurt miners’ profitability prior to the difficulty adjustment, and the approaching Bitcoin halving will push their breakeven price up further. Given that, it’s quite possible that a “delayed supply” situation could result in a steady stream of tokens on the market, which could push prices down.
Whether delayed supply would add immense selling pressure on cryptocurrencies remains unclear. An argument could be made that when the price of Bitcoin remains stable in between $6,000 to $7,000 despite heightened sell-off by miners, it demonstrates market strength and stability.
The rapid upsurge of Bitcoin from $3,600 to $6,500 within a span of days is worrying some investors. Historically, Bitcoin has performed well over a long period of time when its price remained stable for three to four months, as it creates a stronger bottom for the asset to recover from. If buyers remain on the sidelines in stablecoins, the price of Bitcoin could easily fall again.