Bitcoin and the risk of stablecoin liquidity shortage – Holders should know THIS!

• Are stablecoin reserves holding back liquidity flows into Bitcoin?
• Bitcoin ETFs have grown significantly lately and might have influenced the crypto’s price too

Stablecoins play a vital role during Bitcoin’s bull and bear markets. They are the medium through which liquidity flows into BTC and they also provide a buffer for holding value during bearish times. However, could stablecoin liquidity be holding back Bitcoin?

CryptoQuant founder Ki Young Ju postulated in a recent analysis that stablecoins are not capable of driving bullish momentum. The statement assumed the most bullish scenario, accounting for both Bitcoin and stablecoin reserves. He said,

“Over the past two weeks, we’ve observed significant ETF inflows, led by BlackRock’s IBIT.

If spot ETF inflows might slow down at some point, the BTC/USD buy-side pressure from brokerage firms like Coinbase Prime might weaken, potentially leading the market back into stagnation.…”

According to the exec’s analysis, Bitcoin reserves outpaced stablecoin reserves by more than 6-fold. This means that the current stablecoin reserves may not be enough to match peak Bitcoin demand.

Bitcoin had a $1.38 trillion market cap, at the time of writing. On the contrary, the collective stablecoin market cap, at press time, was $172.887 billion.

Here, it’s worth noting that the latter grew from as low as $123.74 billion in September 2024 – Its lowest level in the last 3 years.

Source: DeFiLlama

Bitcoin ETFs have been driving demand

The analysis also explored the role of ETFs in Bitcoin’s price action. It noted that a cooling down in Spot ETFs demand over the last 2 weeks was followed by weak demand.

The analysis also toyed with the idea that Bitcoin’s price action risked stagnation if Spot EFT demand slows down to extreme lows.

Source: X

This observation coincided with the latest price action and ETF flows. For example, Bitcoin ETFs recently experienced a slowdown in demand on the last day of October after previously achieving a week of positive flows.

The latest ETF data revealed that Bitcoin ETFs have concluded the week with net outflows. For example, ETFs recorded $54.9 million in outflows on Friday. Meanwhile, BTC has been struggling to recover back above $70,000 – Confirming a slowdown in demand.

Nevertheless, Bitcoin ETFs were up by 62% from their approval date earlier this year. Here’s a look at how the ETF flows have performed so far –

Source: Farside.co.ke

At the time of writing, Bitcoin ETFs held over $24.4 billion. This impressive growth is a sign of the growing demand from the institutional class.

Meanwhile, the latest outflows are likely associated with the uncertainty around the election period. It will be interesting to see how things play out after the elections.

Also, institutional investors have been responding to the resurgence of global liquidity, something that underscores potentially good tidings for holder. This is because lower interest rates have been paving the way for a risk-on sentiment.