Bitcoin has experienced a period of stagnation in its price since reaching its peak in March. According to analysts at CryptoQuant, this stagnation can be attributed to the tight monetary policy in the U.S. The analysts reported on July 3 that the tightening of monetary policy in the U.S. since March 2022 has led to a reduction in stablecoin supply, which has had a direct impact on Bitcoin’s ability to rally further.
The overall stablecoin supply began to decline in early 2022 when the Federal Reserve started raising interest rates. Although stablecoin supply started to climb again later in 2023, interest rates have remained high at over 5% for more than a year. This has created a challenging environment for Bitcoin to flourish. The analysts pointed out that Bitcoin has been rising on the back of expectations of lower interest rates and increased liquidity from fiscal policies.
The analysts concluded that in order for Bitcoin to enter a bull market, there needs to be an increase in stablecoin liquidity and circulating supply through more accommodative monetary policy in the U.S. Until then, Bitcoin may continue to trade sideways or experience corrections, highlighting the importance of investors adopting a long-term perspective. Lower interest rates make cash a less attractive investment option, leading investors to turn to high-risk assets like cryptocurrencies and tech stocks.
Over the past few months, stablecoin market capitalization has been on the rise, currently standing at $161 billion, representing around 7% of the total crypto market. However, this is still less than half of its peak in 2022. Tether remains the dominant player in the stablecoin market with a market share of almost 70% and a current supply of $112 billion. Circle, on the other hand, holds a market share of around 20% with a circulating supply of $32.5 billion. Maker’s DAI comes in as the third largest stablecoin with a $5 billion market cap and a share of just over 3%.
Circle CEO Jeremy Allaire has predicted that stablecoins could potentially account for 10% of “global economic money” within the next decade. This projection hints at the growing significance of stablecoins in the overall financial ecosystem, especially as regulatory agencies and central banks continue to explore the potential of digital currencies. As the market dynamics continue to evolve, stablecoins are likely to play an increasingly integral role in the digital economy.
The impact of tight U.S. monetary policy on Bitcoin and stablecoins underscores the interconnected nature of the global financial landscape. As investors navigate through uncertain market conditions, a strategic long-term approach is crucial for capitalizing on potential opportunities in the cryptocurrency market.
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