The cryptocurrency market is seeing one of its strangest trends lately and it doesn’t look good for bitcoin valuations. and other tokens.
That trend is the contraction of the market capitalization of the two main stablecoins pegged to the dollar, Tie and USD currency (USDC). Their combined market value has fallen to $257.9 billion, the lowest since Nov. 20, after peaking near $265 billion in mid-December, according to data from CoinDesk. The drop has been particularly pronounced in the last ten days.
USDC accounts for the majority of the decline, with its market capitalization falling by more than $4 billion in ten days and by $6 billion to $71.65 billion since mid-December. Tether’s value has fallen by just over $1 billion to $186.25 billion over the same period.
The bearish trend shows traders withdrawing cash from the cryptocurrency market, a trend that coincides with institutions withdrawing billions from spot bitcoin exchange-traded funds listed in the United States.
Stablecoins like USDT and USDC, pegged to the US dollar, act as an easy gateway for regular money to flow into digital assets, funding cryptocurrency purchases and DeFi yield plays, but now that’s reversing. Think of these like casino chips. You exchange regular cash (fiat) for chips before you go to the gambling hall, play, and then cash out your remaining chips for dollars when you finish and return home.
“Money is flowing out of cryptocurrencies instead of waiting on the sidelines: Typically, when traders sell Bitcoin or altcoins, that money stays in cryptocurrencies as stablecoins. A drop in the value of the stablecoin market shows that many investors are cashing out fiat money instead of preparing to buy dips,” blockchain analysis firm Santiment said in an explanatory post on X.
The firm added that the declining supply of stablecoins raises questions about the sustainability of market gains, especially in alternative cryptocurrencies.
“Stablecoins are the main source of liquidity used to purchase cryptocurrencies. When their supply falls, there is less capital available to drive prices up quickly, making rebounds weaker or slower,” he noted.
In short, the reduction in the supply of stablecoins could hinder the price rally of bitcoin and other cryptocurrencies. Bitcoin, the leading cryptocurrency by market value, has rebounded to nearly $89,000 from the weekend low of $86,000.
The drop in supply of stablecoins, especially USDC, issued by US-regulated Circle Internet Financial, could be a reflection of investor frustration over delays to the Clarity Act, a proposed law to regulate these dollar-pegged tokens in the US.
“Narratively speaking, investors and traders appear to be discounting the allure of US cryptocurrencies. The CLARITY Act remains stalled in the Senate, while Republicans are prioritizing legislation focused on purchasing power ahead of the midterm elections, reducing the near-term regulatory push for cryptocurrencies,” Aurelie Barthere, senior research analyst at Nansen, said in an email.
He added that the passage of the bill would be a significant bullish catalyst for the market.
