key takeaways
- $23.6 billion of stablecoins are currently on exchanges, lowest since October 2021
- 45% stablecoins have fled the exchanges in the last four months
- 61% of USDC has left exchanges in the three weeks since the collapse of the Silicon Valley bank, while 50% of BUSD has evaporated since the regulator announced its closure.
- Stablecoin supply continues to decline since FTX plunge in November, but has gotten worse recently
- Capital flowing into T-bills, with 5x the amount of Treasury accounts created last year as of 2021
- Bitcoin’s falling price and volume are more extreme, but rising interest rates have driven massive liquidity out of the markets
- The Federal Reserve is now stuck between a rock and a hard place, as rising interest rates are needed to combat inflation, but the faltering banking sector may force its hand.
It’s always turbulent in the crypto markets.
The waters have been particularly choppy lately in relation to the stablecoin market. There are currently fewer stablecoins on crypto exchanges than at any time since October 2021.
But where is all the money going? In Bitcoin, Hiding in a cold wallet? Away from crypto all together?
In this piece, we dig into the data to try to figure out where exactly the money is going, and why, as well as what this means for bitcoin and how it ties back to the Federal Reserve.
stable coin flight
first things first. Stablecoins are fleeing exchanges at an unprecedented pace. In less than four months, 45% of stablecoins have left the exchange. This is a decline from $43.1 billion to $23.6 billion, a pace never seen before.
The chart shows a clear downward trajectory since explosion of FTX In November 2022 – The momentum has been increasing since the beginning of the year.
In the next chart, we focus on the outflows alone, helping us to zone in on the momentum of these movements and how they compare to previous outflows.
We can see that, for example, we saw huge rallies in May 2022 (when LUNA collapsed) and May 2021 (when bitcoin fell from $58K to $37K in a week, despite no clear trigger). But the difference this time is that the increased pace of withdrawals has continued for a much longer period of four months and counting.
Perhaps the layering in prices is more indicative of what is happening. In this next chart, we can see that large declines in the price of bitcoin have been accompanied by large amounts of stablecoin withdrawals.
But this brings us to an interesting crossroads: it takes time Separate. While FTX closed bitcoin’s drawdown from $20,000 to $15,500 in November, bitcoin has since gained 80%, back to $28,000. And yet, the stablecoin balance continues to slide.
BinanceUSD and UCD Coins Run Into Trouble, But Tether Is Over
So why is this time different? Why are stablecoin withdrawals rising while bitcoin is rising?
Well, the events surrounding Binance USD and USD Coin are the most obvious. Last month it was announced that Binance USD was shutting down due to US securities laws (deep dive on that 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 development means that BUSD will gradually go to zero.
3/ As a result, BUSD market cap will only decrease over time.
— CZ 🔶 Binance (@cz_binance) February 13, 2023
And that has started. 17% of the bus was pulled immediately from the exchanges in the days following the announcement. Today, the BUSD supply on exchanges is 7.2 billion, a 50% decrease from the number at the time the lawsuit was announced.
But there is much more here that goes beyond the impact of BUSD’s regulatory-driven decline. First, BUSD supply has been falling since the FTX debacle, when there were $22 billion on 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 reserve at the fallen Silicon Valley bank. While deposits were guaranteed by the US administration, the episode spooked the market and triggered outflows that were not reversed.
On March 10, as the SVB crisis and therefore concerns about USDC reserves came to light, there was $6.65 billion of USDC on exchanges. Today, less than three weeks later, it is at $2.57 billion, a 61% drop – completely wiping out the increase in USDC supply on the exchange that occurred after the BUSD halving.
Which brings us to the third member of the Three Musketeers, Tether. Has the supply of all BUSD and USDC become the number one stablecoin hover (hoover means vacuum, for all you US readers)? not good.
There was $17.81 billion worth of Tether on exchanges as the world popped the champagne on New Year’s Eve. Today, March 27, is $13.55 billion, a decline of 24%.
Putting the balances of all three stablecoins on one chart, as can be seen below – clearly, Tether has the lion’s share, but stablecoins balances across the board are vanishingly small.
“There’s a lot of talk about Tether’s rise in market share”, Max Coupland, director of CoinJournal, said. “This is a story in itself, but to us, the greater impact is the significant decline in the stablecoin market at large. Tether may have gained market share, but it is remarkable to see the evaporation of 24% of USDT balances on exchanges. is — and that this drawdown hammer has led to market share gains despite how rapid the flight of capital has been from across the space.
Where is all this going?
So, the natural question is where is all the money going?
Since the start of the year, bitcoin is up 64%, adding $209 billion to its market cap while climbing from $16,500 to $27,000. So are people moving all their stablecoins off the exchange into bitcoin?
It is a difficult question to answer. Looking at the stablecoin supply ratio (SSR), which is the ratio of bitcoin supply to stablecoin supply, shows that it has increased significantly over the past few months (it was the exact opposite before).
But that doesn’t mean stablecoins are flowing into bitcoin, and drawing that conclusion seems like a bit of a reach.
In all likelihood, this simply means that the bitcoin markets are becoming less liquid as capital is leaving the entire space. This would help explain why this year’s move has been so violent, as less purchasing power was needed to move the dial.
Treasury Markets Hold the Answer to the Riddle
But we shouldn’t forget where interest rates are right now. 6-month US Treasury bills are currently paying close to 5%, with 3-month yields at 4.6%. It’s starting to make a little more sense why there’s less money in crypto right now, isn’t it?
In fact, according to TreasuryDirect.gov, the website where government bonds can be purchased, 3.6 million accounts were created in 2022 as interest rates rose — a fivefold increase over the previous year. And extrapolating accounts created from the first ten weeks of the year, we’re on track for another 1.1 million to be created in 2023 (though updated plans from the Federal Reserve could change that). ,
That’s what the Federal Reserve wants
And this allows us to go back to the root of the issue. Why is the Federal Reserve raising interest rates in the first place?
The Fed is raising rates to combat inflation, which has risen faster than they anticipated. And it wasn’t just the speed, it was the stickiness of the price move – the “momentary” dream was nothing more than a pedal, a dream.
To eliminate that inflation, liquidity needed to be pumped out of the system. Which, as this piece demonstrates, is exactly what happened. Bitcoin is a more volatile and thin asset than other financial markets, which is why the impact has been so dramatic, but we’ve seen riskier assets drop in price across the board over the past year.
In the end, there is nothing surprising about the fall in the price of bitcoin, nor the flight from capital markets, when viewed against the backdrop of a crippling increase in interest rates.
Of course, hindsight is everything, and investors were badly caught out here. Now, as the banking sector is wobbling under the weight of these rising interest rates, the Federal Reserve is stuck between a rock and a hard place; It could stop raising rates and become the central bank that failed on the all-important inflation mandate, or it could raise rates further to fight inflation, risking more chaos in the banking sector.
The market is betting on the latter, that the Fed will move towards accommodative monetary policy, which is why we have seen a rally in the price of bitcoin. This is exacerbated by thin liquidity in the markets.
If a dovish tone comes from the Fed in the future, or the pivot drains market confidence, you can bet your bottom dollar that bitcoin’s gains will be halted, if not reversed, into 2023 so far. If anything, it certainly feels like the market and the economy are at an inflection point at the moment.
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