The supply of USDT and the price of BTC show significant correlation.
Does the rise of USDT lay the groundwork for Bitcoin to emerge from its stagnation?
In February, $450 million worth of tether [USDT] flowed into exchanges, signaling an increase in stablecoin liquidity and a rise in risk appetite. Can this influx of capital bolster support for bidding on Bitcoin [BTC] and trigger a breakout?
Historically, the price movements of BTC have reflected the trends in USDT supply. In mid-December, as BTC reached $108,000 (at that time a peak), the circulating supply of USDT also peaked at $140 billion.
However, a shift in momentum caused BTC to rebound to $91,000, alongside a $3 billion drop in USDT supply to $137 billion—a signal of hedging activity.
Notably, USDT supply soared to a new all-time high of $141 billion at the time of writing, accompanied by fresh inflows to exchanges. If this capital rotation translates into spot demand, BTC could exceed $100,000.
However, if most of it is leveraged trading rather than actual purchases, it could lead to a liquidity trap. In such a scenario, prices may rise temporarily but lack real support, resulting in a sharp reversal as positions are excessively closed.
Is USDT fueling genuine demand, or is it merely a lever?
Since BTC’s last attempt to breach $100,000, the estimated leverage ratio (ELR) has been on the rise, reaching higher peaks.
Simultaneously, inflows of BTC to exchanges have outpaced outflows, indicating weak point demand. With more leverage at play, there is a heightened risk of a cascading liquidation if prices drop.
The market sentiment in the fear zone is buoyant due to unrealized profits and the weak accumulation of BTC ETFs, but the surge in USDT inflows does not necessarily bode well for BTC.
Instead, the rising leverage and increased weak demand elevate the risk of long-term liquidation cascades, rendering BTC’s price action more fragile in the short term. Caution is warranted.
