As Bitcoin has been trading sideways over the past few months, traders are awaiting their signals to re-enter the market before the cryptocurrency resumes the bullish momentum it had earlier this year.
In a memo on Wednesday, an analyst at CryptoQuant highlighted a signal worth paying attention to: the liquidity of stablecoins.
Stablecoins: The Key to Driving Bitcoin Higher
Analyst Mac wrote, “The bottom line is, for Bitcoin to truly rebound, we need to see an increase in stablecoin liquidity and circulating supply,” according to CryptoQuant.
The author states that due to the US tightening monetary policy in the previous two years, Bitcoin has been unable to break new highs above $73,700 since mid-March 2024.
Higher global interest rates have damaged the liquidity of the entire economy, including stablecoin liquidity and the total circulating stablecoin supply.
Stablecoins are crypto tokens pegged to fiat currencies, used as equivalents to dollars in the crypto trading economy by exchanges, with traders often holding the token in preparation for future BTC purchases.
Tether (USDT), the world’s most popular dollar-pegged stablecoin, saw its market value drop from $83 billion in April 2022 to $65 billion in November 2022.
Its total value quickly recovered to over $82 billion in the second quarter of 2023 and has steadily climbed to over $112 billion in the past three quarters, during which time it rose alongside Bitcoin’s price. That is to say, in the second quarter of 2024, the total liquidity of stablecoins remained essentially flat, as did the price of Bitcoin.
Liquidity Conditions and Bitcoin Price
The analyst wrote, “The reason Bitcoin’s price has been rising over the past year is firstly due to expectations of a decrease in interest rates, and secondly because fiscal policy differs from monetary policy, continuing to bring liquidity to the market.”
In a recent article, BitMEX co-founder Arthur Hayes believes that the US government’s continued fiscal spending will persist, which will continue to drive up the prices of assets like Bitcoin.
However, analyst Mac at CryptoQuant believes that the market’s next round of increases also requires the US to adopt a more “relaxed monetary policy.” Currently, the market predicts that the Federal Reserve may not start cutting interest rates until September.
Mac says, “Before we see these signals, Bitcoin may trade sideways or further correct, and the wise move for investors is to take a long-term view of the market,” concludes CryptoQuant.