As Stablecoin Inflows Hit New Highs, How Does This Affect Bitcoin?

Stablecoins such as Tether (USDT) are a staple of the cryptocurrency market, offering both a safe haven to shore up cash outside of traditional finance systems and providing a majority of the highly liquid trading pairs that exist on the market today.

A stablecoin springboard

Last week, on-chain intelligence and analysis platform Glassnode highlighted that the total supply of stablecoins has been rising significantly since October 2023 with over $4billion in fresh capital being added to the stablecoin market.

The “aggregated market cap net position change” indicator that Glassnode is referring to tracks monthly changes in the total supply (or market cap) of stablecoins. In very simple terms, a negative metric value suggests a decline, and if the metric is reading positive, it means that stablecoin supply has increased in the last 30-day period.

As the graph shows, net inflows over the last month have pushed the metric into the green, making it the largest increase since March 2022. The stablecoin market cap is presently hovering at the $134bn mark, with 24-hour trading volumes sitting at $60bn.

Cause and effect

Naturally, the question is how this will affect Bitcoin and the crypto market more broadly. So let’s think about this using simpler dynamics. The increase in stablecoin supply suggests the demand is also up, which you would correctly assume means that investors are shoring up their assets amid volatile market conditions.

It’s worth noting that this has both bullish and bearish implications. Though not always correct, it is usually fair to assume that if investors are looking to keep their value safe, they may be anticipating worsening market conditions. On the positive side, fiat-pegged stablecoins often make their way back into the market when investors are ready to get back into the market.

To begin with, let’s look at how the market movements of Bitcoin have affected the stablecoin market.

Bitcoin: Stablecoin Supply Ratio (SSR), is an essential metric that is calculated by dividing the market cap of BTC by the market cap of all stablecoins. It’s an insight into the balance between BTC and stablecoins denominated in BTC.

The ratio can serve as an indicator of buying pressure and/or market sentiment. For example, a low SSR suggests strong buying momentum for BTC which could convert to bullish sentiment and price gains. On the flip side, a high SSR would imply that purchasing power is limited for BTC due to a low supply of stablecoins, hinting at bearish conditions.

As you can see in the graph above, the SSR has increased from 4.58 at the beginning of October, to 11.6843 at the time of writing. From this, we can speculate that Bitcoin’s market cap has outpaced stablecoins and therefore Bitcoin’s purchasing power is high.

Although Bitcoin is now skirting the support level of $40k after falling from highs of $48k on 11 January 2024, the SSR remains relatively low. Large stablecoin inflows are considered to be bullish regardless of market conditions and can be a springboard for further price action.

The timing of the jump in the stablecoin net position change as BTC drops in price suggests that a rotation from BTC to other assets did take place, and investors may be set to rotate their stablecoins back into the market when they feel BTC is at an optimum re-entry price, which is presumed to be somewhere close to the $40k support line.