- $23.6 billion in stablecoins currently on exchanges, at least since October 2021
- 45% of stablecoins have fled exchanges in the past four months
- 61% of USDC left the exchange in the three weeks after the Silicon Valley bank crash, while 50% of BUSD has evaporated since regulators announced they would shut down.
- The trend of declining stablecoin supply since the FTX crash in November has continued, but has recently worsened
- Capital flows into treasury bills, five times the amount of treasury accounts created last year from 2021
- The decline in the price and volumes of Bitcoin is more extreme, but liquidity has been pulled from the markets in general due to the high interest rates
- The Federal Reserve is now stuck between a rock and a hard place, as higher interest rates are necessary to combat inflation, but the volatility of the banking sector may impose its hand
It is always turbulent in the cryptocurrency markets.
The waters have been particularly choppy lately with regards to the stablecoin market. There are currently fewer stablecoins on cryptocurrency exchanges than at any time since October 2021.
But where does all this money go? inside bitcoin? Hidden in cool wallets? Away from coding entirely?
In this article, we dive into the data to try to ascertain exactly where the money is moving, and why, as well as what that means for Bitcoin and how it all relates to the Federal Reserve.
The most important things first. Stablecoins are fleeing exchanges at an unprecedented speed. In less than four months, 45% of stablecoins have left the exchange. This represented a decline from $43.1 billion to $23.6 billion, a pace never seen before.
The chart shows a clear downward trend since FTX Explosion In November 2022 – with the pace of growth accelerating since the beginning of the year.
In the following chart, we focus on the outflows alone, which helps us determine the speed of these movements and how they compare to previous periods of outflows.
We can see that, in terms of precedent, we saw huge spikes in outflows in May 2022 (when LUNA collapsed) and May 2021 (when Bitcoin fell from $58k to $37k in a week, though for no apparent reason). But the difference this time around is that the high pace of withdrawals has continued for a much longer period of time, at four months and still going.
Perhaps the price layers give more indication of what is going on. In the following chart, we can see that the significant decline in the price of Bitcoin has coincided with large amounts of stablecoin withdrawals.
But it brings us to an interesting crossroads: looks this time Different. FTX also started pulling Bitcoin to $15,500 from $20,000 in November, and since then Bitcoin has increased by 80%, back to $28,000. However, the stablecoin balance continued to decline.
BinanceUSD and UCD Coin have had problems, but Tether has also drained
So why is this time different? Why do stablecoin withdrawals remain high while bitcoin is rising?
Well, the events around Binance USD and USD Coin are the most obvious. The announcement last month that Binance USD was shutting down due to the US Securities Act (deep dive into this circus here). At the time, the stablecoin had a market capitalization of over $14 billion, the third largest after USDC and USDT.
In the words of CEO Changpeng Zhao, the developments mean that BUSD will slowly drop to zero.
3/ As a result, the market value of the US dollar will decrease over time.
– Czechoslovakia 🔶 Binance (cz_binance) February 13, 2023
And that’s what started. 17% of BUSD was Immediately pulled out of the stock exchanges in the days following the announcement. Today, the supply of BUSD on exchanges has reached 7.2 billion, which is 50% less than the number when the lawsuit was announced.
But there is more here than the impact of the US dollar bank’s regulatory-driven downfall. Firstly, BUSD supply has declined since the FTX debacle, when there were $22 billion in exchanges, as the chart above shows.
But there is also the case of USD Coin, the stablecoin issued by Circle, which held 8.25% of the backing reserves in the collapsed Silicon Valley bank. While the US administration has been guaranteeing deposits ever since, this incident shook the market and triggered outflows that were not reversed.
On March 10, with the SVB problem emerging and thus the concern about USDC reserves, there were $6.65 billion USDC on the exchanges. Today, less than three weeks later, there are $2.57 billion, down 61% – completely wiping out the surge in USDC supply on exchanges that occurred in the aftermath of the BUSD shutdown.
Which brings us to the third member of the Three Musketeers, Tether. Has the number one stablecoin (hoover meaning void, for all American readers) smashed all of the supply of BUSD and USDC? Well, no.
When the champagne world popped up on New Year’s Eve, there was $17.81 billion worth of tether on the exchanges. Today, on March 27, that’s $13.55 billion, down 24%.
Putting the balance of all three stablecoins on one chart, the following can be seen – Tether obviously has the lion’s share, but the balance of stablecoins across the board has evaporated.
“There is a lot of talk about Tether’s rising market share,” he said. said Max Copeland, Director of CoinJournal. “This is a story in itself, but for us, the biggest impact is the noticeable downturn in the stablecoin market overall. Tether may have gained market share, but it is notable to see 24% of USDT balance evaporate on exchanges – and it has gained share in The market despite this downturn limits how difficult it is for capital to flee the entire space.”
Where does all this go?
So, the natural question is, where does all the money go?
Since the beginning of the year, bitcoin is up 64%, adding $209 billion to its market capitalization while rising from $16,500 to $27,000. So do people just send all their stablecoins from exchanges to Bitcoin?
This is a difficult question to answer. Looking at the stablecoin supply ratio (SSR), which is the ratio of the supply of Bitcoin to the supply of stablecoins, shows that it has skyrocketed in the past few months (it had done just the opposite before).
But that doesn’t necessarily mean that stablecoins are flowing into Bitcoin, and you conclude that this looks like an arrival.
In all likelihood, this simply means that the bitcoin markets are becoming less liquid because capital is leaving the entire space. This will help explain why the transition this year was so violent, as less purchasing power was needed to move the dial.
The treasury market holds the answer to the puzzle
But let’s not forget where interest rates are now. The 6-month US Treasury is currently paying close to 5% currently, and the 3-month yield is at 4.6%. It’s starting to make a little more sense as to why there’s less money in cryptocurrencies right now, right?
In fact, looking at TreasuryDirect.gov, the website where government bonds can be bought, there were 3.6 million accounts set up in 2022 with interest rates rising — a fivefold increase from the previous year. And extrapolating from the accounts created from the first 10 weeks of the year, we’re on track to see another 1.1 million accounts created in 2023 (although the Fed’s updated plans may change that). .
This is what the Fed wants
This allows us to return to the core of the issue. Why does the Federal Reserve raise interest rates in the first place?
The Fed raised interest rates to combat inflation, which escalated much faster than imagined. And it wasn’t just about the speed, it was the reason for the constant price hike – the “passing” pedal dream wasn’t any more, a dream.
In order to topple this inflation, liquidity had to be withdrawn from the system. Which is exactly what happened, as this piece demonstrates. Bitcoin is a much more volatile and thinner asset than other financial markets, which is why the impact has been so significant, but we’ve seen the price of the risky asset drop across the board over the past year.
In conclusion, there is nothing surprising about the collapse of the Bitcoin price, nor the flight from the capital market, when viewed in hindsight against the backdrop of the astonishing rise in interest rates.
Of course, hindsight is everything, and investors were surprised here. Now, as the banking sector teeters under the weight of rising interest rates, the Federal Reserve is caught between a rock and a hard place. It could stop raising interest rates and be the central bank that failed to mandate all-important inflation, or it could raise interest rates further to fight inflation while risking more chaos in the banking sector.
The market is betting on the latter, that the Fed will move to a softer monetary policy, which is why we have seen a bounce in the price of Bitcoin. This has been exacerbated by the lack of liquidity in the markets.
If a hawkish tone comes out from the Federal Reserve in the future, or if it drains market confidence in the pivots, you can bet the bottom of the dollar that bitcoin’s gains so far in 2023 will stall, if not reversed. Whatever happens, he definitely feels that the market and economy are currently at an inflection point.
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