Stablecoins have something great about them. Right, they are stable! Therefore, they are an ideal asset on a crypto exchange. When a cryptocurrency is volatile, quickly swap to a stablecoin. On the other hand, many traders always keep a stash of stablecoins on an exchange. When a good deal is available, they can strike instantly.
However, there is more to a stablecoin than just this. They also appear in a few on-chain indicators for a technical analysis (TA). One of these indicators is the SSR, or the stablecoin supply ratio. It measures the ratio between stablecoins on one side and Bitcoin on the other side. In turn, this gives an insight to how much buying power stablecoins have over the Bitcoin supply. We are going to show you how this works and what it means.
1/ Introducing The Stablecoin Supply Ratio (SSR).
SSR is a metric that can be understood as a proxy for the supply/demand mechanics between $BTC and USD. It allows quantification of stablecoin buying power over #bitcoin.
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What Is the Stablecoin Supply Ratio SSR?
The stablecoin supply ratio shows the buying power of stable coins over the Bitcoin supply. Two unrelated factors can change the SSR.
- The Bitcoin price changes
- There is a change in the stablecoin supply.
The definition of SSR is a relatively easy calculation. SSR is the market cap ratio of BTC divided by the market cap of all stablecoins. This looks like this:
If the indicator value is low, it allows for buying more of the Bitcoin supply. For example, if the value is 10, stablecoins can buy 10% of the total BTC supply.
In other words, if the Bitcoin price drops, the SSR lowers as well. However, this doesn’t always work like this. Remember the second factor that can change the SSR? A change in the stablecoin supply. Currently, there must be quite an influx in stablecoins. The BTC price keeps going up. On the other hand, the SSR keeps dropping. At the time of writing, the SSR hovers around 8. This means that stablecoins can buy 1/8 or 12.5% of the current BTC supply.
Take note that the calculation of the SSR happens with the following stablecoins: BUSD, DAI, GUSD, PAX, TUSD, USDC, USDS and USDT.
Currently, we can observe that whales have been stocking up on stablecoins. Whales with 10,000 to 10 million USDT have stocked up over $1 billion in buying power during February 2022. That’s an increase of 7% during just one month. In other words, whales are waiting. They want to buy Bitcoin at a low price. This means that there is a bullish sentiment among these whales.
Tether or USDT is the biggest stablecoin in volume. The stablecoin inflow has increased since 2017. However, it wasn’t until January 2021 that it started to make an impact on supply. There is no max supply, but currently, there are some 81 billion in circulation. This is according to CoinGecko. Such an increase in supply also means a lower SSR. During the same time, the Tether balance on exchanges increased as well. On the other hand, the amount of USDT locked up in smart contracts has declined since late 2020. In other words, there is more USDT locked up in exchanges compared to smart contracts. Remember the whales stocking up?
As of June 2020, daily transaction volume has not been below $1 billion. Currently, around $3 to $5 billion USDT changes hands each day.
What Is the Role of Stablecoins in Crypto Markets?
The most important role stablecoins have is to be a substitute for fiat money on exchanges. They have this use case because they have low volatility. Currently, stablecoins outperform other cryptocurrencies in trading volumes. Another use case for stablecoins is that it is easy to transfer them between exchanges. Depending on which network you use, fees can be below $1.
Although stablecoin prices could be volatile a few years back, now they are what they promise. That is to say, stable!
It comes as no surprise that stablecoins have made a massive impact on crypto trading. As a result, they play an influential role in the crypto ecosystem.
- They are perfect vehicles to enter or exit a (Bitcoin) position.
- This makes them a perfect substitute for fiat on exchanges.
Furthermore, they have an important role in the demand and supply fluctuation of crypto markets. This, in turn, impacts Bitcoin’s price directly.
Because they are native to blockchains, it is possible to pull their data. In turn, you can use this to examine demand and supply action between BTC and USD.
The SSR is a relatively easy way to understand the relationship between BTC and USD demand and supply. A low SSR means there is a high buying power for Bitcoin. In other words, stablecoins can buy lots of BTC. As a result, the BTC price can increase.
On the other hand, a high SSR means the opposite. The buying power of fiat is weak. Note that in both cases, USDT substitutes fiat, or the USD.
We notice an increasing adoption of stablecoins over time. As a result, the SSR can become an important indicator in technical analysis.
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