Bitcoin Bear Market Confirmation? Stablecoin Market Cap Slides $7 Billion In A Single Week

The cryptocurrency market is dealing with renewed strain as a pointy contraction in stablecoin provide raises contemporary considerations about Bitcoin (BTC) and total market liquidity. 

Over the previous week, the entire market capitalization of ERC‑20 stablecoins has dropped by roughly $7 billion, a transfer analysts say might sign deeper structural weak point fairly than a brief correction.

Bitcoin Outlook Darkens

According to market analyst Darkfost, who shared the data on social media platform X (beforehand Twitter), that is the primary time within the present cycle that the stablecoin market has skilled such a steep weekly decline from roughly $162 billion to $155 billion in simply seven days. 

Darkfost described this drop as a clearly unfavourable sign, suggesting that buyers are more and more selecting to exit the crypto market altogether as an alternative of rotating capital inside it.

The mechanics behind the development are comparatively easy. When demand for stablecoins falls, it sometimes means buyers are changing their holdings again into fiat forex fairly than preserving capital parked on-chain. 

As a outcome, stablecoin issuers burn extra tokens which can be not wanted, resulting in a decline in total provide. For this motive, a shrinking ERC‑20 stablecoin market cap is broadly seen as a bearish indicator.

Importantly, the identical sample is starting to look on different blockchain networks, reinforcing considerations that the development is just not remoted to Ethereum-based property. 

Darkfost additionally pointed to historic precedent, noting {that a} comparable contraction in stablecoin provide in 2021 coincided with Bitcoin’s transition right into a bear market, though the Terra Luna collapse additionally performed a job throughout that interval.

Analyst Warns Of Potential Crypto Liquidity Crunch 

At the identical time, macroeconomic dangers are resurfacing. Crypto analyst Crypto Rover has warned that the chance of a US authorities shutdown by January 31 has surged to almost 80%, up dramatically from estimates of simply 10% to fifteen% in the future earlier. 

According to his analysis, a authorities shutdown might pose critical challenges for Bitcoin and crypto markets attributable to its influence on liquidity. Historically, when shutdowns start, the US Treasury rebuilds its Treasury General Account (TGA) by pulling money out of monetary markets. 

During the final shutdown cycle, the TGA elevated by roughly $220 billion, successfully draining that quantity of liquidity from the system. Crypto markets, Rover argues, are significantly susceptible to such situations.

In the earlier episode, markets initially rallied briefly earlier than liquidity dried up. That was adopted by sharp declines, with Bitcoin and Ethereum (ETH) falling between 20% and 25%, whereas altcoins suffered even deeper losses.

This time, the setup seems much more fragile, in response to Rover’s view. Liquidity out there is already skinny, investor confidence is weak, and institutional capital is basically concentrated in equities and gold fairly than digital property.

Furthermore, Rover notes that volatility is elevated, and crypto costs are reacting sharply to comparatively small capital flows. Under these situations, a shutdown-driven liquidity drain could possibly be particularly damaging, probably triggering one other extreme market sell-off.

At the time of writing, Bitcoin was buying and selling at $88,183, having erased all of the good points seen within the first week of the 12 months. It is now down 5% over the previous seven days, with the cryptocurrency sitting 30% beneath the all-time high of $126,000 reached final October. 

Featured picture from OpenArt, chart from TradingView.com