Latest / The Cryptocurrency Economy with Fexingo: Bitcoin, Ethereum, and Digital Money Markets / Why Stablecoin Supply Dropped During Bitcoin Recovery
Transcript
- Lucas: Bitcoin is up about three point two percent over the last five days. It's sitting at sixty-three thousand six hundred and forty-four dollars as of this morning. ETH and SOL are both up a couple percent too. So it looks like a modest recovery. Luna: Right, and that's after weeks of grinding lower. So you'd expect the supporting infrastructure to be expanding again. Lucas: You would. But it's not. The total stablecoin market cap has actually kept shrinking during this bounce. We're talking about the fuel for crypto trading — the dollars that sit on exchanges ready to deploy — and it's been drawing down even as prices tick higher. Luna: That's the opposite of what usually happens. Normally stablecoin supply expands with price, right? More money coming in. Lucas: Exactly. In 2021, every leg up in Bitcoin was accompanied by Tether and USDC minting billions. It was the classic 'dry powder' narrative — more stablecoins means more buying power waiting to enter the market. But since late 2024, that correlation has been weakening. And in the last couple months, it's basically broken. Luna: I remember when the TerraUSD collapse in 2022 wiped out forty billion dollars in stablecoin value overnight. That was the big shock. But now we're seeing a slow bleed, not a crash. Lucas: Right. And the mechanism is different. Terra was a algorithmic stablecoin that disintegrated. Today's shrinkage is more about people choosing to put their dollars elsewhere. The Fed funds effective rate is still at three point six three percent. Why would you hold a zero-yield USDC in your wallet when you can get nearly four percent in a money market fund? Luna: So it's a carry trade. Capital is rotating out of stablecoins into yield-bearing assets. Lucas: Exactly. And it's not just TradFi. There's a new generation of yield-bearing stablecoins on-chain. Ethena's USDe, for example, offers a yield derived from funding rates and staking. That product alone has absorbed a meaningful chunk of the market. So the old stablecoin leaders — Tether, USDC — are losing share to products that pay you to hold them. Luna: And that changes how we think about exchange liquidity. If stablecoins are moving into yield-bearing wrappers, they might not be as 'dry' as they seem. Lucas: Precisely. A lot of that capital is still in crypto, just not in the form of raw USDT sitting on Binance. It's in USDe, it's in liquid staking tokens, it's in lending protocols. So the stablecoin supply data might be understating the actual buying power available. But it also might mean that when a real buying opportunity appears, the capital has to unwind those positions first. There's friction. Luna: So the market is less responsive. That could explain why we're seeing Bitcoin drift higher on relatively low volume. Lucas: Exactly. And then there's the SpaceX IPO. They're raising seventy-five billion dollars. That's a massive pool of capital that might have otherwise trickled into crypto. Retail investors especially — they're getting a chance to buy SpaceX at a valuation north of two hundred billion. That's going to suck up attention and dollars. Luna: It's the biggest IPO in history, by some measures. So it's not surprising that some speculative capital is rotating out of crypto into that. Lucas: Right. So we have three forces converging: high risk-free rates pulling stablecoin holders into traditional yield, on-chain yield products competing with plain stablecoins, and a giant IPO vacuuming up retail enthusiasm. The result is that the stablecoin supply is shrinking even as crypto prices try to recover. Luna: That feels like a structural shift, not a temporary blip. Lucas: I think it is. And it's worth watching because if Bitcoin does stage a real rally, the lack of stablecoin dry powder could cap it. Or it could mean we need new infrastructure to bring that capital back in quickly. Luna: Speaking of infrastructure that brings people in — I've had a few listeners ask how they can support the show. If walking through the economy with us has made something click, you can help keep this podcast ad-free and independent. Lucas: Yeah, that's right. It's the simplest thing — just buy me a coffee dot com slash fexingo. All lowercase. No tiers, no perks, just a way to say the show matters to you. Luna: And it genuinely helps. So back to stablecoins — I want to talk about the risks in these yield-bearing products. USDe, for example, relies on funding rates. What happens if those rates go negative? Lucas: That's the billion-dollar question. Ethena's model is essentially a basis trade: it goes long Bitcoin or ETH and short futures to capture the funding premium. That works great in bullish or neutral markets, but in a sharp downturn, funding can flip negative. Then the yield disappears and the product has to rely on its reserve fund. Luna: So it's not risk-free. And if there's a crisis of confidence in USDe, that could cause a rapid unwinding. Lucas: Exactly. We've seen this movie before. TerraUSD looked great until it didn't. The difference is that USDe is over-collateralized and transparent about its mechanics. But it's still new, and it's still dependent on market conditions. Luna: So we have a stablecoin ecosystem that's more diverse, but also more complex. And the old simple metric of Tether market cap no longer tells the whole story. Lucas: Right. For traders, that means you can't just look at stablecoin supply and say 'liquidity is weak.' You have to look at where the capital is actually deployed. Are those USDe tokens sitting in wallets ready to buy? Or are they locked in a yield strategy with a thirty-day unstaking period? That matters. Luna: So what should a listener watch to gauge real buying power? Lucas: I'd look at two things. First, the total stablecoin supply excluding the yield-bearing products — Tether, USDC, BUSD. That's your 'hot money' metric. Second, look at exchange inflows of those same stablecoins. If we see a spike in USDT flowing into Binance or Coinbase, that's a signal that dry powder is loading. The USDe and sUSDe are more like savings accounts — they don't move fast. Luna: So we could actually see a situation where total stablecoin supply is flat or declining, but exchange balances of liquid stablecoins are rising. That would be bullish. Lucas: Exactly. And that's the nuance that gets lost in the headline 'stablecoin market cap shrinking.' We need to decompose it. The data we have this morning shows USDT at around eighty-five billion, USDC at thirty-two billion. Both are down from their peaks in 2025. But USDe has grown to about six billion. Luna: Six billion is not nothing. That's roughly the market cap of a mid-tier altcoin. Lucas: Right. And it's growing. So the old guard is shrinking, the new guard is expanding, and the net is slightly negative. But the composition matters more than the aggregate. Luna: And that brings us back to the Fed. With rates at three point six three, the opportunity cost of holding zero-yield stablecoins is real. Until the Fed cuts, I don't see that dynamic reversing. Lucas: No, I agree. The Fed paused in June, and the market is pricing in maybe one cut by December. So we're looking at a regime where risk-free rates stay above three percent for at least the next six months. That's a headwind for plain stablecoins and a tailwind for yield-bearing ones. Luna: So the stablecoin market is evolving from a simple payments rail into a yield-bearing asset class. And that fundamentally changes how crypto liquidity works. Lucas: It does. And for the listener trying to understand where the market is headed, the old playbook of 'rising stablecoin supply equals bullish' is obsolete. You have to dig deeper now. Luna: Alright, let's leave it there. Next time we'll look at whether the SpaceX IPO is actually pulling capital from crypto or if it's a separate pool. Lucas: Good note to end on. Thanks for listening.