n-chain analyst Axel Adler Jr. noted in a recent post that exchange inflows of Ethereum-based stablecoins like Tether (USDT) and USD Coin (USDC) have fallen noticeably below their 90-day average deposit levels. Exchange inflows refer to the total amount of a cryptocurrency deposited to the wallets of centralized exchanges. Traditionally, when this metric is high, investors are actively sending coins to exchanges to trade or sell them.
As the chart in Adler's post displayed, the 7-day moving average for stablecoin inflows had plunged well below the 90-day average. This represented a sharp and sizable decrease in deposits flowing onto exchanges starting in mid-December 2023. Such a steep decline suggests stablecoin holders have less motivation now than in prior months to transfer their funds onto exchanges, where they would likely look to swap their stablecoins for other digital assets.
What Reduced Inflows Could Imply
So what might reduced stablecoin exchange inflows signal about where the overall cryptocurrency market is headed? When significant amounts of stablecoins are deposited onto exchanges, it generally points to traders having the aim of using their fiat-pegged funds to purchase more volatile cryptocurrencies like Bitcoin and Ethereum. After all, stablecoins offer a safe haven for capital while traders wait for a purchase opportunity in riskier crypto assets.
Thus, lower inflows could mean declining demand to swap stablecoins for other cryptocurrencies. If the interest to buy volatile coins is cooling, it removes one source of buying pressure that might fuel further price increases. Without stablecoin reserves being deployed, it removes this pool of potential buy-side liquidity for other digital assets. And with Bitcoin still being the dominant and most traded crypto asset, less demand for it in particular may drag its price down.
Implications for the Bitcoin Price
Let's now bring the discussion back specifically to how this stablecoin exchange flow trend may impact Bitcoin. As the world's largest cryptocurrency accounting for over 40% of the total crypto market cap, Bitcoin acts as a major gateway through which capital flows into and out of the industry. When the Bitcoin price falls, it tends to negatively influence sentiment across the wider altcoin market as well.
Analysts have pointed out that every new all-time high Bitcoin reaches is followed by a correction period that allows traders who missed the rally to enter at lower prices. With the stablecoin exchange inflow metric recently turning bearish, it suggests demand to buy Bitcoin and other major cryptos using stablecoin reserves may be shrinking for now. Without this source of potential buying pressure, it removes one factor that could help sustain Bitcoin's price at elevated levels.
Since mid-2022 when the inflows turned down sharply, Bitcoin has indeed failed to extend its previous all-time high and has spent over a month oscillating in the high $40K-$50K range. This price action may be the beginning of a longer correction necessitated by reduced demand, allowing traders who missed the last bull phase to start accumulating again. Unless exchange inflows of stablecoins see a quick rebound, the short-term outlook favours further downside for Bitcoin's value as macro conditions shift to being less accommodating of risk-on markets.
With macroeconomic uncertainty looming and reduced stablecoin flow activity serving as a bearish indicator, the short-term outlook favours Bitcoin and the overall crypto market undergoing a potential deeper correction to find a bottom. This price reset may open the doors for a new accumulation phase by traders seeking lower entry points after missing out on the previous bull run. Unless stablecoin exchange inflows see a rebound, downside risks remain for the top cryptocurrency in the near term.
