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Inflows of stablecoins to exchanges have slowed as investors have become negative on Bitcoin, but a rise in USDC minting might be a hint of imminent regulation.
The increase in the market cap and circulating supply of stablecoins has been one of the greatest indications for obtaining a broad pulse on how market participants are feeling during bullish and negative periods.
Monitoring the Tether (USDT) treasury for big issuances was a frequent strategy employed by analysts and traders to position themselves for a probable price increase in Bitcoin (BTC) and altcoins, and this has historically been a strong source of alpha for those willing to take a risk.
A closer look at the data provided by CryptoQuant indicates that a seismic shift in the makeup of the stablecoin market may be taking shape as USDT issuance has begun to stagnate while the circulating supply of competitors like USD Coin (USDC) has resumed its uptrend over the past week.
When looking at the exchange inflows and reserves of each individual stablecoin, there has actually been an increase in USDC deposited onto exchanges while the amount of USDT has declined, leading to the plateau seen in total stablecoin reserves held on exchanges.
This is significant because Tether printing has historically been the impetus for major market moves, but its continued legal challenges and questions regarding assets held in reserve have made holding the token more of a liability as regulators increasingly crackdown on the wild west nature of the cryptocurrency market.
As seen on the chart above, while the circulating supply of stablecoins was on a steady rise through the first five months of 2021 and accelerated somewhat as the market sold-off in May, issuance came to a standstill at the beginning of June as the reality set in that a bearish trend had taken over the market.
There was also a spike in the stablecoin inflow transaction count that occurred on May 29, just as the stablecoin supply was peaking, which was followed by a brief increase in the price of BTC to $40,000 before another wave of selling dropped the price back below $34,000 and stomped out any building momentum.
Since then, stablecoin inflows to exchanges have fallen to the lowest level since October 2020. The Crypto Fear and Greed Index also registers “extreme fear”, backing up the argument that there is a lack of demand from retail and institutional level investors.
Stablecoin inflows rise as BTC approaches $30,000
While the month of June saw a decline in stablecoin deposits to exchanges, the drought may have ended on June 21 as a decrease in the price of BTC below $33,000 appears to have tempted stablecoin holders to contemplate purchasing the dip.
— Tempting Beef (@tempting_beef) June 21, 2021
Further evidence of activity for USDC has been provided by Whale Alert, a well-known Twitter bot that posted numerous updates about USDC minting and transfers on June 21 as the crypto market experienced another round of selling.
— Whale Alert (@whale_alert) June 21, 2021
Typically, stablecoin inflows are viewed as bullish, a recent newsletter from CryptoQuant offered a word of caution because similar spikes in stablecoin issuance in the past were followed by a prolonged period of sideways trading or price declines.
“After the bottom of the last bear market (2018-2019) we saw a steady rise in issuance events. At the top (June 28, 2019) of this bullish period there was a large issuance event (the two big spikes in July-August 2019 are due to USDT ETH issuance). It looks like the same is happening right now.”
This data serves as a warning that not all stablecoin issuance is a predictor of Bitcoin price rises because there are a variety of factors that could account for mintings, such as institutional investors purchasing USDC for future purchases or altcoin and DeFi protocols preparing to integrate USDC pairs.
In the long run, this shift has the potential to benefit the crypto sector because audited projects like USDC are deemed more legitimate in the eyes of governments and regulators, but the sheer size of USDT’s $62.67 billion market cap and its ubiquity across crypto exchanges means that any attempt to de-Tether will almost certainly cause market pain.