A widely followed crypto analyst is warning that Bitcoin (BTC) and other digital assets could see a deeper market correction due to one factor.
In a new strategy session, DataDash host Nicholas Merten tells his 512,000 YouTube subscribers that stablecoin liquidity is a significant indicator of crypto market trends.
He warns that stablecoin liquidity continues to contract, which could indicate Bitcoin and other digital assets will see additional downward price action.
“If we are going to be in an environment where liquidity is contracting, how is that going to impact crypto? Let’s just take a look here at the growing importance of liquidity.
We can see here that, for example, from April 2019 towards July 2019, when we had a first initial relief rally before we really kicked off the bull market later on, we essentially saw Bitcoin accelerate from $3,500 all the way up here towards around $12,000-$13,000 at that time.
And that was during the period of time when we saw about a 119% increase in stablecoin liquidity, a doubling of stablecoin supply in the crypto space…
And in a period of time where that stablecoin growth kind of stagnated [in late 2019 and early 2020]. Well, what happened here? The trend stagnated…
There’s a very clear reason and it wasn’t just the pandemic as to why Bitcoin stalled here. [It was] because there wasn’t liquidity expansion.”
He also notes that when Bitcoin moved from $3,900 to the $65,000 range in 2021, there was a corresponding 2,183% increase in stablecoin liquidity.
According to the trader, an expansion of price for crypto appears unlikely in the current environment of contracting stablecoin liquidity.
“Liquidity and price acceleration go hand-in-hand. If you have declining liquidity or stagnant liquidity, price is likely not going to expand. This is true not only for global assets like US equities or foreign equities and stocks but also as well for cryptocurrencies…
For these assets to continue doubling, for Bitcoin to go from a $500 billion asset to $1 trillion… that’s just going to require a bigger amount of dollars in order to do so. Well, we are in a contracting environment. Dollars are becoming more scarce. Stablecoin liquidity does not lie here. Week-by-week, month-by-month here, generally speaking, we’re still seeing a decrease in stablecoin liquidity.”
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