Is a new rally brewing as Bitcoin reclaims $38K and stablecoins 'flooding' exchanges?

The price of Bitcoin (BTC) has extended its recovery on Jan. 14, reclaiming the $38,000 level. What's more, the weekly candle has now turned green for the fifth consecutive week despite the 28% crash earlier this week. 

BTC/USD Weekly candle chart (Bitstamp). Source: Tradingview

Meanwhile, stablecoin deposits are flooding into cryptocurrency exchanges, according to data from CryptoQuant. This inflow may act as a short-term catalyst for Bitcoin as it suggests that sidelined capital is moving back into BTC.

Stablecoins inflow on exchanges. Source: CryptoQuant

Why are stablecoins indicative of strong buyer demand for Bitcoin?

In the cryptocurrency market, many traders sell crypto assets, like Bitcoin, to stablecoins rather than cash.

Stablecoins, such as Tether (USDT), is pegged to the value of the U.S. dollar and are tradable across exchanges.

Most exchanges require a complicated Know Your Customer (KYC) verification process for bank transfers, and cash deposits into exchanges could take a long time.

As such, if a whale or a high-net-worth investor wants to buy and sell millions of dollars worth of Bitcoin, stablecoins can be far more convenient than cash.

The high demand for stablecoins from traders has led the valuation of Tether to increase in recent months. Last month, the market cap of Tether surpassed $20 billion. A month later, this number is already above $24 billion, indicating a rise in sidelined capital within the cryptocurrency market.

Dry powder moving to exchanges

Meanwhile, stablecoin deposits into exchanges have increased substantially over the past 24 hours. CryptoQuant tracks the wallets of exchanges and observes stablecoin deposits and outflows.

Exchanges' stablecoin reserve. Source: CryptoQuant

Across major exchanges, stablecoin deposits spiked noticeably on Jan. 13, right as the price of Bitcoin began to recover.

On Jan. 13, the price of Bitcoin dropped to as low as $32,500 after nearly $1 billion worth of futures contracts were liquidated.

Investors were actively buying the dip, as shown by the increase in stablecoin deposits and the increasing open interest of the Bitcoin futures market. As a result, Bitcoin saw a quick turnaround, rallying by more than 10% overnight.

Bitcoin futures open interest. Source: Bybt.com

So what comes next?

Alex Saunders, a cryptocurrency analyst, said that stablecoins are “flooding exchanges,” which is often indicative of a bullish trend.

Prior to the recovery, Michael van de Poppe, a full-time trader at the Amsterdam Stock Exchange, said an all-time high is likely for Bitcoin if it surpasses $38,000 again.

Overnight, the price of Bitcoin pierced through the $38,000 resistance area, which Van de Poppe pinpointed. Hence, in the short term, BTC is on track to retest its record-high. He said:

“Bitcoin didn't change much. It flipped the $33,000 level for support and therefore is eager to test the $37,000-38,000 level. That one needs to flip. If it does, we'll be eager for new all-time highs. If not, more consolidation likely.”

Bitcoin’s rally also coincides with the opening of Grayscale’s products on Jan. 13. If the value of Bitcoin continues to rise, it could propel more institutional and accredited investors to obtain exposure to BTC through the Grayscale Bitcoin Trust (GBTC).

There is also a strong argument to be made that the reopening of GBTC kickstarted the rally, to begin with, signifying that the uptrend is led by institutions, not by retail investors.