The cryptocurrency market has seen one of its rarest trends lately, and it’s not good for Bitcoin’s valuation and other tokens.
The trend has seen the top two dollar-pegged stablecoins shrink in market capitalization, tether and US Dollar Coin (USDC). After peaking at nearly $265 billion in mid-December, their combined market capitalization has fallen to $257.9 billion, the lowest level since November 20, according to CoinDesk data. The decline has been particularly steep over the past ten days.
USDC suffered the biggest decline, with its market capitalization falling by more than $4 billion in 10 days and by $6 billion since mid-December to $71.65 billion. During the same period, Tether’s value fell by more than $1 billion to $186.25 billion.
The downward trend shows traders withdrawing funds from the cryptocurrency market, a trend that is consistent with a trend of institutions withdrawing billions of dollars from U.S.-listed spot Bitcoin exchange-traded funds.
U.S. dollar-pegged stablecoins such as USDT and USDC have provided a convenient door for conventional funds to flow into digital assets, funding cryptocurrency purchases and DeFi gains, but now this situation is reversed. Think of them like casino chips. You can exchange your regular cash (fiat currency) for chips before entering the arcade, play the game, and then cash out your remaining chips for USD after you’re done playing and go home.
“Funds are leaving cryptocurrencies, rather than waiting on the sidelines: Typically when traders sell Bitcoin or altcoins, the funds remain in cryptocurrencies as stablecoins. The decline in stablecoin market caps suggests that many investors are cashing out for fiat rather than preparing to buy on dips,” blockchain analytics firm Santiment said in an explainer on X.
The company added that the reduction in stablecoin supply raises questions about the sustainability of market gains, especially when it comes to alternative cryptocurrencies.
“Stablecoins are the primary source of liquidity used to purchase cryptocurrencies. When their supply declines, less capital is available to quickly push prices up, causing the rally to weaken or slow,” it noted.
In short, a reduction in stablecoin supply could hinder the price rebound of Bitcoin and other cryptocurrencies. Bitcoin, the leading cryptocurrency by market capitalization, has rebounded from a weekend low of $86,000 to nearly $89,000.
The decline in stablecoin supply, particularly USDC issued by U.S.-regulated Circle Internet Financial, may reflect investor frustration over delays in the Clarity Act, a proposed law to regulate these dollar-pegged tokens in the United States.
Aurelie Barthere, principal research analyst at Nansen, said in an email: “From a narrative perspective, investors and traders appear to be pricing out the magic of U.S. cryptocurrencies. The Clarification Act remains stuck in the Senate, while Republicans prioritize purchasing power-focused legislation ahead of the midterm elections, thus undermining near-term regulatory momentum for cryptocurrencies.”
She added that passage of the bill would be a meaningful upside catalyst for the market.