Bitcoin (BTC) Faces Downside Volatility Risk as Stablecoin Supply Stalls Ahead of US Inflation Data

Bitcoin's (BTC) rapid recovery from below $90,000 since Monday hints at bullish prospects. However, one factor casts doubt on the sustainability of these gains

Bitcoin's (BTC) rapid recovery from below the $90,000 level since Monday has sparked optimism about bullish prospects. However, one key factor casts doubt on the sustainability of these gains and highlights the potential for significant downside volatility if upcoming U.S. inflation data exceeds expectations on Wednesday.

The factor in question is the stalling supply of major stablecoins, which indicates the absence of fresh capital inflows into the market. According to data tracked by Glassnode, the supply of the top four stablecoins by market value - USDT, USDC, BUSD, and DAI - has flattened around the $189 billion mark, indicating a 30-day net change of only 0.37%.

Stablecoins are cryptocurrencies designed to maintain a value peg to an external reference, such as the U.S. dollar. These tokens are commonly used to fund cryptocurrency purchases and also served as a safe haven during the 2022 bear market.

The recent slowdown in new liquidity via stablecoins, which comes as the market awaits the release of the U.S. consumer price index (CPI), contrasts sharply with the expansion of stablecoin liquidity observed during the November-December rally and early last year.

"That the late-2024 rally required almost 2x the capital inflow for a smaller price gain highlights the speculative demand and liquidity-driven momentum that has since cooled," noted Glassnode in a Telegram note.

The data, due at 13:30 UTC Wednesday, is expected to show the cost of living rose 0.3% month-on-month in December, maintaining November's pace. The year-on-year figure is seen printing at 2.9%, up from November's 2.75%. The core figure, which strips out the volatile food and energy component, is forecast to have risen 0.2% month-on-month and 3.3% year-on-year.

An above-forecast headline/core figure would likely amplify recent concerns about the central bank being less aggressive in cutting interest rates than expected. These concerns, bolstered by Friday's strong jobs report, were partly responsible for BTC falling below $90,000 on Monday.

The latest drying up of stablecoin liquidity, which is often viewed as dry powder waiting to be deployed for crypto purchases, stands in stark contrast to the $27.3 billion in inflows registered in November and December that partly fueled the BTC bull run from $70,000 to over $108,000.

Meanwhile, a much lesser stablecoin inflow of $14.68 billion was seen during the first quarter of 2024, when prices rose nearly 70% to over $70,000.