Are Bitcoin Liquidity Fundamentals Changing?

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As Bitcoin (BTC) managed to survive above the $30,000 level during another low-volume weekend, it drew attention to one of its key liquidity factors. The supply of dollar-pegged stablecoins keeps shifting, with potential repercussions for BTC market prices. Stablecoins are also used in DeFi trading and arbitrage pairs, as they are a relatively predictable source of liquidity.

For years, especially after 2017, one of the central and constantly growing sources of liquidity for Bitcoin spot and futures markets was Tether (USDT). The stablecoin initially launched on the Bitcoin Omni layer, later expanding to nine blockchains, including TRON, Algorand and Ethereum. 

Now, there is a rapid unraveling of the share of USDT, which for years held nearly 100% of the market share of stablecoins. Since July 14, the supply of USDT shed hundreds of millions of tokens, with the potential to contract the supply to below $62B. 

No new USDT has entered circulation for a 50-day streak already, the longest period in history without new minting. 

Data shows that $USDT has not been issued on #Ethereum for nearly 50 days, setting a record for the longest time in history. #USDT $eth #Tether

— Crypto₿uzz (@cryptobuzznews) July 18, 2021

Tether, Inc. is also under increasing regulatory scrutiny in the USA due to doubts about the backing of each USDT. 

No New USDT Minting for Months

The usual pattern of USDT is that new minting would arrive on the markets and rapidly lift the BTC price. Now, the supply of USDT hovers near $62B, while it slightly diminishes as some of the coins are slowly retired. 

Representatives of Tether, Inc. claim this is due to lowered demand for USDT tokens. But in the past, hundreds of millions of USDT were created within hours of a BTC crash, suggesting the minting does not always reflect organic demand. 

The share of USDT in terms of market capitalization is 54% of the entire stablecoin supply. At the same time, there is a rapid rise in some of the more recently created stablecoins. At this point, USDT is still responsible for 88% of crypto trades. 

USDC Share Grows Quickly

More than 23% of all funds locked in stablecoins have flowed into USD Coin (USDC), the heavily regulated asset. Buying USDC is only available after a KYC procedure. The asset is also not anonymous and individual wallets can be frozen or limited if unusual transaction activity is noticed. 

USDC has grown its influence, taking over 4% of all crypto trading, up from about 3% a few weeks ago.

What is curious about USDC is that its supply grew exponentially after May 21, close to one of the biggest sell-offs for BTC. The asset expanded from a supply of $14B to above 21B and growing. In July alone, USDC has grown its supply by the equivalent of $1B, to above $27B in total market capitalization. 

USDC may be used as a safer storage for dollar-like positions, while the general market attitudes see BTC as turning to another bear market.

BUSD Unusually Active

BUSD is the third most influential coin with a fixed $1 price. BUSD only holds about 9% of all stablecoin liquidity, but its share of the market reflects the highly active Binance trading. BUSD is now responsible for more than 9% of all crypto trading. 

BUSD also has highly active markets with USDT and USDC. Swaps between stablecoins can be performed for various reasons, including DeFi participation, arbitrage, or the need to have a certain asset for less popular altcoin pairs. 

Smaller, more niche stablecoins remain stagnant and are often limited to a single exchange. Only the most liquid stablecoins with a large supply usually circulate on the Binance exchange and between exchanges.

Is BTC Still Capable of Recovery

For weeks, BTC has traded with a significantly worsened sentiment. The coin remains relatively flat, ranging between $30,000 and $35,000. 

With a fearful sentiment, BTC may continue to unravel below its 50-day moving average, potentially moving toward $28,000.

$BTC weekly :
We are still trading above the 50moving average which is still bullish. We need a weekly close above this level
($31 880) !
a weekly close below would indicate a very bearish trend continuation. But for now it still looks healthy. pic.twitter.com/p8pExOLhYz

— SB INVESTMENTS (@BONTESA_) July 17, 2021

BTC trading is in a curious state where there is still evidence of spot accumulation and BTC being taken off exchanges. At the same time, derivative trading has not recovered to the levels from before May 2021.

BTC traded at $31,640.91 on Monday, its price sliding a bit slower compared to altcoins. BTC market cap dominance increased to above 46% once again, as all other assets were depressed. More than 60% of all BTC trading is still against USDT, and USDC has not managed to supply enough liquidity to the leading coin. 

BTC may also face downward pressure from a series of holdings unlocked from the Grayscale Capital GBTC Trust. For now, it is uncertain if the unlocked packages of BTC will lead to immediate selling, or be drawn back into GBTC shares. 

$BTC weekly :
We are still trading above the 50moving average which is still bullish. We need a weekly close above this level
($31 880) !
a weekly close below would indicate a very bearish trend continuation. But for now it still looks healthy. pic.twitter.com/p8pExOLhYz

— SB INVESTMENTS (@BONTESA_) July 17, 2021

GBTC pricing is independent of stablecoin trading, and currently trades at a discount to BTC market prices, the equivalent of $29,880.

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